Elections have tax consequences

In principle, there is something in state taxes that federalism-minded conservatives should like: Most of us would prefer if the main tax collectors in Americans’ lives were located in Austin or Tallahassee — or even Sacramento — rather than in Washington. Fifty states with 50 different tax regimes and 50 different ways of spending the money provide Americans with lots of choices, lots of interstate competition, and 50 laboratories of democracy in which to test different approaches to social problems. The question of the California model vs. the Texas model need not ultimately be an issue of right and wrong but simply one of different preferences: There are Oakland people and there are Odessa people, and there is no reason to think that they should have to live in the same way or that they should want to.

The problem is that allowing for the deduction of state taxes against federal tax liabilities creates a subsidy and an incentive for higher state taxes. California in essence is able to capture money that would be federal revenue and use it for its own ends, an option that is not practically available to low-tax (and no-income-tax) states such as Nevada and Florida. It makes sense to allow the states to compete on taxes and services, but the federal tax code biases that competition in favor of high-tax jurisdictions. There is a certain kind of partisan Democrat who likes to sneer that the rich blue states subsidize the poor red ones (which isn’t exactly true; there’s a reason that there isn’t a big, expensive Air Force base in Manhattan), but there is a great deal of cross-subsidy, too. Tax handouts such as the state-tax deduction and the mortgage-interest deduction interact in complex ways with state and local policies (the nice liberals in San Francisco practice utterly ruthless economic segregation) to partly shift the burdens of the progressive model away from the residents of our progressive metros.