Reform bills engage in double taxation, double standards

It’s a bad idea for the U.S. to borrow money to give tax cuts. With a $20-trillion debt and $700 billion annual deficits, enacting a tax cut bill stands logic on its head. 

But, if Congress insists on proceeding, at least they should reconsider their provision that would tax Americans on their state and local tax payments. Taxpayers are now allowed to deduct on their federal tax return the state and local taxes they have paid.

{mosads}The logic for that is simple. If you are required to pay those state and local taxes, it means you did it with income you no longer have. So, the current proposal to eliminate the deduction of state and local taxes on the federal tax return means that taxpayers will be required to pay taxes on their tax bill.

Taxpayers can easily understand the concept of paying taxes on their income. But to tax Americans on income they couldn’t retain because they had to pay state and local tax obligations turns logic on its head. Taxing tax payments is taxing income you ultimately didn’t receive.

The only conceivable reason policymakers would propose this double taxation would be to raise additional revenue to pay for other tax reforms. But, frankly I think it undermines the credibility of “reform.” Moreover, the proposed tax bill allows corporations to continue deducting their state and local taxes while prohibiting individuals from doing the same. That is a double standard as well as double taxation.

I was a member of the House tax-writing committee when we reformed the tax code in 1986. There was discussion in the 1986 debate to end these deductions, but I supported retaining the deductions for state and local taxes, mortgage interest and charitable deductions.

I believed they represented important investments in our economy, and I didn’t view them as special deals for a privileged few. The mortgage deduction and charitable giving are discretionary choices made by the taxpayer, but  they are important deductions that provide significant value to our economy.

The state and local tax deduction is not discretionary. Taxpayers must comply with their state and local tax obligations. To tax them on income they don’t have because they were required to pay their state and local taxes is just wrong.

(Note: the sales tax deduction was eliminated in 1986, but it was later restored for states that do not have a state income tax.)

In the 1986 tax reform legislation, we broadened the tax base and lowered the rates. We closed some big loopholes, including the passive loss scams going on in our country, and it allowed us to reduce the top individual tax rate to 28 percent, which was a major achievement

Today, the tax committees in Congress can find similar tax scams ranging from corporate inversions, to widespread tax haven abuses by corporations and individuals. Closing down those abuses as a starting point would be the best approach to making the tax code more simple and more fair for all Americans.

It makes sense to close loopholes and lower tax rates. But it doesn’t meet any test of fairness to write a new law telling the American people they should be taxed on their state and local tax payments. It forces Americans to pay double taxation on phantom income.

There are big differences between the successful work we did to reform the tax code in 1986 and the tax bill being considered this year in Congress.

What I am seeing this year isn’t tax reform. It’s just an effort to cut taxes any way possible.

In 1986, our effort to reform the tax code was an open and bipartisan process. We took nearly two years to complete our work, and the changes we made to the tax code were subject to real debate giving the American people time to understand and digest them as well as respond to them. 

This year, the majority party decided to write a partisan tax cut bill without any input or recommendations from Democrats in Congress. Moreover, instead of being an open process, there was a cloak of secrecy about what was in the tax proposals. 

When the legislation was finally disclosed to the public, action on the bill was scheduled within just a couple of days. They rushed to try to get it enacted on a timeline that would prevent the American people knowing what was in the legislation and having an opportunity to react to it.

The American people deserve better.

Byron L. Dorgan is a former U.S. senator and U.S. congressman (D-N.D.) and currently serves as a senior policy advisor for the Washington, D.C. law firm Arent Fox LLP.