No equity/efficiency trade-off here
By Scott Sumner
Imagine a public policy question where there is no equity/efficiency trade-off. Where the most efficient policy is also the most equitable. A win-win situation.
Surprisingly, such cases do occur. Even more surprisingly, an example of this sort of policy reform was enacted in late 2017, with a $10,000 cap on the tax deductibility of state and local taxes. Even more surprisingly, many politicians are now trying to repeal the reform. Or maybe not so surprisingly:
Similar debates are playing out elsewhere. Opposition to the Salt cap is one point of agreement between Mikie Sherrill and Jay Webber, respectively the Democrat and Republican vying for an open seat in New Jersey’s 11th district. Republican representative Peter King of New York’s second district voted against the tax law and has introduced legislation to restore the deduction.
In the wealthy 45th district of Orange county, California, the website of Democratic candidate Katie Porter said she is “a strong advocate for using our tax code to encourage home ownership”. She is challenging incumbent Republican Mimi Walters, who backed the tax bill.
Of course this is no surprise to public choice theorists. It should also alert us to look beyond the media headlines, and not assume that either political party necessarily favors “equity”. Here’s how the gains from repealing this deduction would be allocated:
By the way, when thinking about the impact of this tax provision on upper income groups, it’s important to keep in mind that this was part of a much bigger tax package, which provided major benefits to top 20% income earners (like me). Not just personal income tax cuts, but also corporate tax cuts that helped shareholders. I’m not saying you can’t find individuals who were harmed by this tax provision, but the overall impact of tax reform almost certainly benefited both the top 1% and the top 20%.
Indeed the biggest problem may have been an excessively large tax cut. Personally, I like low taxes. But at some point the federal government needs to find a way to pay for all this increased spending.
As far as efficiency, the cap of property tax deductions helps in three ways. It simplifies the process of filling out tax forms, because many more will now take the standard deduction. It removes a price distortion that tends to subsidize homeownership when property taxes are deductible. And it removes a federal subsidy that biases states toward inappropriately large spending levels.
PS. I live in the Mimi Walters district mentioned in the article.