President Donald Trump and Congressional Republicans think we pay too much in state and local taxes in Illinois.
To make it up to us, they want to take away one of our most valuable federal income tax breaks.
True story. You might want to pay attention.
The tax break in question, in case you haven’t heard, is the deduction for those aforementioned state and local taxes. Republicans want to eliminate it as part of a larger rewrite of the federal tax code.
About one-third of the people who file federal income tax returns itemize their deductions, and nearly all of those who itemize claim the deduction for state and local taxes.
In Illinois, this allows taxpayers to subtract their state income tax and local real estate tax payments from their federal adjusted gross income, subject to certain limitations.
That makes it a particular benefit to many people living in Chicago and its suburbs, where real estate taxes are higher than national norms, as are personal incomes.
The concept behind the deduction is pretty simple. It saves you from being taxed on income that isn’t really income because you have to spend it to pay other taxes. Some consider that double taxation.
The deduction dates all the way back to the inception of the federal income tax in 1913.
But one result, critics say, is that residents of states with lower taxes end up subsidizing the higher tax states such as New York, Connecticut, New Jersey, California — and Illinois.
That’s one way of looking at it, I suppose, although it seems a gross oversimplification.
The reality of whether one state subsidizes another is a bit more complicated.
It has long been recognized that Illinois comes out on the short end of the stick as far as getting money back from the federal government.
A recent Rockefeller Institute of Government study found that Illinois contributed $17 billion more in taxes to the federal government in 2015 than it received in federal spending.
That was the third largest balance of payment deficit of any state. Only New York and New Jersey do worse.
That measure also might be an oversimplification, but it still begs the question: who’s subsidizing who?
Eliminating the state and local tax deduction could generate an estimated $1.3 trillion for the federal government over the next decade.
Republicans hope to use that money to pay for tax cuts in other areas, including a reduction in the tax rate for the richest Americans.
Middle class families in Illinois could also benefit from a proposed increase in the standard deduction, but U.S. Rep. Raja Krishnamoorthi of Illinois is among many who doubt whether such breaks will offset losing the state and local tax deduction.
You may have noticed something else those high tax states have in common. They tend to vote Democratic.
Krishnamoorthi contends eliminating this deduction is a “cynical political move” to redistribute wealth.
“They decided they were going to raise revenue from the people who weren’t going to vote for them anyway,” said the freshman congressman from Schaumburg.
Sure looks that way.
The complication, though, is that plenty of Republican families in Illinois and other high tax states also benefit from that deduction. Some of them have caught on that Trump’s ballyhooed tax cuts may not benefit them.
As a result, Republicans are talking—among themselves–about possible compromises.
Media reports say one idea is an income cap on who is allowed to claim the deduction or to cap the deduction itself. Another is to give taxpayers a choice of claiming either the popular mortgage interest deduction or the state and local tax deduction, but not both.
GOP congressmen from other Democratic states have been outspoken on the importance of saving the state and local tax deduction. As is so often the case under the Trump presidency, Illinois Republicans are MIA.