Republicans in red states face political dilemma tied to taxes

Republicans in red states face political dilemma tied to taxes
© Greg Nash

Among the promises made by supporters of the Republican tax cuts signed into law by President TrumpDonald John TrumpHouse Republican threatens to push for Rosenstein impeachment unless he testifies Judge suggests Trump’s tweet about Stormy Daniels was ‘hyperbole’ not defamation Rosenstein faces Trump showdown MORE last December was that it would raise economic growth to new heights, generate wage increases for working Americans, and not blow up federal government debt.

These assertions, widely challenged by independent analysis at the time, have turned out to be completely false, and have led Sens. Bob CorkerRobert (Bob) Phillips CorkerPoll: More voters oppose Kavanaugh’s nomination than support it Ford opens door to testifying next week Police arrest nearly two dozen Kavanaugh protesters MORE (R-Tenn.) and Marco RubioMarco Antonio RubioJudd Gregg: Two ideas whose time has not come Nikki Haley: New York Times ‘knew the facts’ about curtains and still released story March For Our Lives founder leaves group, says he regrets trying to 'embarrass' Rubio MORE (R-Fla.) to express misgivings about their votes in favor of the law. The recent teacher strikes in Kentucky, Arizona, Oklahoma and West Virginia may lead more red state Republicans to regret their votes, not because of the effect on the debt or on working Americans, but because of the effect on state budgets.

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One of the more contentious portions of the tax law limits the state and local tax (SALT) deduction, whereby taxpayers can deduct state income and local property taxes from their federal income tax returns, to $10,000. Because blue states such as New York, New Jersey, California and Illinois tend to have higher state and local tax rates, while red states have reliably lower tax rates, this provision primarily hurts taxpayers in Democratic-leaning states, which is convenient for Republicans, although not for blue state Republicans.

Republican lawmakers did their best to portray the SALT provision as a good government move, rather than as a stick with which to beat their political opponents. Trump administration officials argued that capping the SALT deduction would end the federal government’s wasteful subsidy of high spending state and local governments.

White House Office of Management and Budget Director Mick MulvaneyJohn (Mick) Michael MulvaneyProtect the Military Lending Act On The Money: Midterms to shake up House finance panel | Chamber chief says US not in trade war | Mulvaney moving CFPB unit out of DC | Conservatives frustrated over big spending bills Warren suggests Mulvaney broke law by speaking to GOP donors MORE asked, “Is it the federal government’s fault that New York taxes are so high that they're driving people out of the state?” To which he answered, “I don’t think it's up to the federal government to save New York from its bad decisions.” But maybe Mulvaney has it backward.

What if the problem is not that blue states tax too much, but that red states tax too little? Blaming higher tax rates on a state’s profligacy is disingenuous. No doubt, many states — both blue and red — could do with improved governance and higher quality politicians. Subsidizing state government spending certainly does carry risks. That said, running more populous, higher density states with older deteriorating infrastructure and serving more diverse populations may just be a relatively expensive proposition.

Moreover, because their residents are usually more lightly taxed than those in blue states, red states have been forced to scrimp on important public services, like education. Three of the four states that have had to deal with walkouts in recent weeks — Arizona, Oklahoma and West Virginia — have among the lowest paid teachers in the country.

Teacher salaries in all four states have dropped based on inflation since 2009 to 2010. Highly skilled teachers are moving on to other states or other careers. Teachers that do stay are forced to deal with inadequate facilities and materials and, periodically, four-day school weeks. None of this bodes well for the children being educated in these systems.

States with educational systems that do not prepare their students for 21st century careers will find it difficult to attract companies that bring high quality jobs. Talented young people will move away to seek their fortune in states with better employment opportunities. Over the long run, states with inadequate education will stagnate, tax receipts will decline, and education will deteriorate even further.

From a public policy perspective, the solution is to invest more money in local school systems by increasing teacher pay and spending more on buildings and materials. Of course, this is not as easy as it sounds. No state has unlimited funds with which to pursue these goals, and no ambitious politician — certainly not one who hopes to be reelected — wants to be the first kid on the block to call for a tax increase.

Local politicians are always happiest when they are spending the federal government’s money. Their voters don’t feel the bite and the politicians get good publicity by spreading largesse using someone else’s money. Had the SALT deduction remained unchanged, the burden of raising red state taxes to support important investments in education could have been partially offset by a reduction in the federal tax bill of residents. Local authorities could have used the federal offset from SALT deduction to give themselves some political cover for such a move.

Some of the negative consequences of the new tax law, such as those on wages and the debt, are just coming into focus. Republican House members are retiring in record numbers, rather than be fired by their constituents for selling the American people that particular bill of goods. The negative consequences of capping the SALT deduction have not yet come into focus, but the recent teacher strikes suggest that a reckoning is coming, and it may include an increasingly dim outlook for red states.

Richard Grossman is a professor of economics at Wesleyan University and a visiting scholar at the Institute of Quantitative Social Science at Harvard University. He is the author of “Wrong: Nine Economic Policy Disasters and What We Can Learn from Them,” published by Oxford University Press.