The escalating tug-of-war between the partisans over the state and native taxes of the wealthy

Democrats wanted to give states billions of dollars to prevent pandemic layoffs, but they didn’t want Republican lawmakers to take the money and instead cut taxes on the rich.

The American bailout, the massive stimulus package passed earlier this month, bans states from using the money for new tax cuts, and Republicans are furious. A group of GOP attorneys general said It could be “the greatest attempt for Congress to invade state sovereignty in the history of our republic”.

It’s not that. But it could be the biggest assault on state sovereignty since 2017, when Republicans struck a blow against democratic states with their tax cut and employment law.

Using practically the same terms, the Democrats criticized the law for limiting state and local taxes that households could deduct from their federal income tax bills. The loss of the deduction meant higher taxes for some households – and the possibility of a backlash against the democratic state and local governments.

The so-called SALT deduction “is important to prevent federal tax power from interfering with the sovereign authority of states to make their own decisions,” said a coalition of attorneys-general from democratic states in vain Lawsuit 2018.

“Washington has launched a calculated and direct attack into the heart of New York,” said Governor Andrew Cuomo (D). said this year.

The previously unlimited deduction allowed Democratic lawmakers to generate much revenue from state income and property taxes without actually burdening their residents as they could then write off the amount they paid off their federal tax bills. It was an indirect subsidy from state governments – or, as then House Speaker Paul Ryan (R-Wis.) Said, it supported “large governing states.”

Tom Williams via Getty Images

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer sign the US bailout plan on March 10, 2021 after the House passed the $ 1.9 trillion aid package.

Republican tax law limited the deduction to $ 10,000, though raw partiality wasn’t the only reason. This also limited the cost of the bill and helped simplify tax legislation by getting more people to use a standard deduction rather than itemizing their expenses.

The change resulted in tax increases for some higher-income individuals in parts of New York, New Jersey, and other Democratic states who use high taxes on public goods such as health care and education. Without the full deduction, democratic states could face pressure to cut taxes and eventually cut spending, although this does not appear to have happened so far.

(The uncomfortable thing about the Democrats who railed against the SALT cap was that they said the law was unduly helping the rich, but the cap was pretty much the only provision of the law that put higher wage earners at a disadvantage The rich continue to enrich as more than half the benefit of repeal would go to households with an income of $ 1 million.)

Now Republicans are saying Democrats are beating up red states, despite the US bailout plan spending $ 219 billion on states to replace revenue lost from declining economic activity. The law specifically states that states can also use the money to help households and businesses increase pay for government employees who do essential work, or to invest in water, sanitation, or broadband infrastructure.

However, the law prohibits states from using the money “to compensate, either directly or indirectly, for a decrease in net tax revenue … resulting from a change in law, regulation or administrative interpretation during the period covered by which taxes are reduced . “

Since money is fungible, these regulations could prevent Republicans from cutting taxes in the first place, even if the tax cut was planned in advance and even if it had nothing to do with help in the bailout.

We take things that are interesting and have political implications, but we make them as simple and conflict-driven as possible.
Richard Auxier, Senior Policy Associate at the Urban-Brookings Tax Policy Center

The Treasury Department has yet to provide guidance on what types of tax cuts are still legal, but Secretary Janet Yellen appeared to agree with the Republicans’ concerns when she testified on Capitol Hill this week.

“We have to define what it means to use money from this law to compensate for tax cuts,” Yellen told the Senate Banking Committee. “And given the fungibility of money, it’s a difficult question to answer, but that is exactly what we have to do, and we will do our best to provide guidance.”

In both the bailout and 2017 tax bill, federal policy may have random political implications, but it wasn’t written just to dominate and punish the other political party, said Richard Auxier, a senior political figure with Urban-Brookings Tax Policy Center. A nuanced change in policy need not be drawn into a bilateral ideological struggle.

“We take things that are interesting and have political implications, but we make them as simple and conflict-driven as possible,” said Auxier.

Senate Finance Committee chairman Ron Wyden (D-Ore.) Said Democrats have no intention of lifting all state tax cuts and the Treasury Department has the expertise to produce good guidance for states.

“It was important to make sure these funds weren’t used on another boondoggle for the very wealthy,” Wyden told HuffPost.

Senator Mike Crapo (R-Idaho), the committee’s top Republican, said he could see the similarity between the partisan’s responses to the two laws, but the bailout may be the bigger affront to states.

“In the first case [Democrats] reject an opportunity in federal tax legislation and in this case try to enforce federal control over state sovereignty, ”said Crapo.

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