“Don’t tax me, don’t tax thee, tax that fella behind the tree.” This bit of doggerel, attributed to the late Senate Finance Committee Chairman Russell B Long, has been a truism of tax policy for decades. But in our era of deep political divisions, it seems more spot-on than ever.
Many Republicans want to shift the tax burden to lower-income people, while many Democrats are looking to increase taxes on high-income households and mid-sized to large businesses. These policies are almost caricatures of themselves. But they fail a key test of a healthy civil society: If we believe government ought to provide certain services or other benefits, everyone ought to help pay for them, not just the “other guy.”
Red states and blue cities
In many cases, this is not a debate over how to divide the share of tax increases. Rather, we are seeing a rash of proposals where all, or nearly all, of the direct burden of new tax increases falls on one group or another.
We’ve seen it in the recently concluded legislative sessions in state capitals around the country. Red state legislatures from Utah to Kentucky cut taxes for middle- and upper-income households while raising them on low-income households. Kentucky, for example, was under pressure to find new revenue to fund raises for public school teachers. So it hiked sales taxes (which disproportionately fall on low-income people) and hiked its lowest individual income tax rates while cutting its corporate tax rate and its top individual rate.
At the same time, deep blue Seattle decided to pay for new subsidized housing and homeless programs by taxing employment at only about 600 of the city’s large and mid-sized corporations, or about 3 percent of its businesses. Amazon, the city’s biggest employer, would pay about 20 percent of the new levy.
Tax the rich
Mountain View CA is considering a similar per-employee tax on large and mid-sized firms to finance housing and transportation efforts. Google would be hit by about half the total tax bill. Cupertino, CA is considering its own version, much of which would be levied on its largest employer, Apple.
Ultimately, low- and moderate-income households may end up paying some of these new taxes in the form of lower wages or—if firms move some operations from these cities to lower-taxed communities-- lost employment opportunities. But in each case the direct tax for major new municipal services would fall on a handful of companies.
Democrats in other states are pushing even more explicit tax-the-rich schemes. The Democratic-controlled Massachusetts legislature has put a millionaire surtax on the November ballot. The measure is backed by both contenders for the party’s nomination to challenge GOP governor Charlie Baker.
“Millionaires and billionaires”
The Democratic candidate for governor of Illinois, J.B. Pritzker (himself a billionaire), wants to fund education and health initiatives with a surtax on “millionaires and billionaires.” Ben Jealous, one of several candidates seeking the Democratic nomination for governor of Maryland, has proposed a 1 percent surtax on income in excess of $500,000 to fund free community college for state residents.
In New Jersey, newly-elected Democratic Governor Phil Murphy has proposed a millionaire’s tax to fund a wide range of social programs. Interestingly, the Democratic-controlled legislature passed similar levies five times in recent years—when lawmakers knew they’d be vetoed by former Republican Governor Chris Christie. Now that they know they’ll make law and not just send political messages, some Democratic legislative leaders are having second thoughts.
Fallout from the TCJA
The story gets a bit more complex in some blue states, thanks to the fallout from the Tax Cuts and Jobs Act’s (TCJA). Even as Democrats propose new taxes on high-income households, some are looking for ways to protect wealthy taxpayers from the effects of the TCJA’s limit on the state and local individual income tax (SALT) deduction. But states that have passed SALT fixes, including New York, New Jersey, Connecticut, and Oregon, are focused on protecting their high-income residents from federal tax increases even as some are pushing state tax hikes on the very wealthiest.
These battles echo last year’s congressional debate over the TCJA. That measure, which passed Congress with no Democratic votes, was primarily a tax cut for all income groups, at least in the short term. But it raised after-tax incomes for high-income households by far more than it benefited those with low- and moderate-incomes.
And national lawmakers never stopped fighting that battle.
Doubling down
Democrats are proposing to pay for new public school funding by rolling back unspecified pieces of the TCJA that benefit high-income households. Earlier this month, Democratic leaders Rep. Nancy Pelosi (D-CA) and Sen. Chuck Schumer (D-NY) had this to say: “Paying for this is simple: revisit the Trump tax cuts for the top 1 percent. Instead of allowing millionaires, billionaires, and massive corporations to keep their tax breaks and special-interest loopholes, Democrats would invest in teachers and students.”
And key Republicans are doubling down on their tax cuts for high-income households. Politico reports that House Ways & Means Committee Chair Kevin Brady’s (R-TX) wish list for the next tax bill includes expanded subsidies for retirement savings and indexing capital gains for inflation—provisions that would target benefits to the wealthy but do little to help low- and moderate-income taxpayers.
It isn’t a surprise that polarized politics is giving us polarized tax policy. In an off-year election, both parties need to play to their bases. For Republicans, that means cutting taxes, especially for their wealthy constituents and businesses. For Democrats, it means raising taxes on “millionaires and billionaires.”
But neither is sustainable policy. Democrats will learn that if they can’t convince middle-income people to help pay for their initiatives, there probably is something wrong with their ideas. And Republicans will realize that voters really do like many programs that progressive, broad-based taxes finance.
