One Top Taxpayer Moved, and New Jersey Shuddered

[crazy canuck]

You misunderstand my point.  If state taxes are deducted from Federal taxes then why wouldn't States charge what they can to maximize local benefit at the expense of the Feds?  Is there a limit on the deduction?

State taxes are not deducted from federal taxes.  They are deducted from federal taxable income (i.e. you don't pay federal income tax on the money you send to the states - nor, in most states, vice-versa).

That is an important clarification.  But if the amount of state tax paid is deducted from federal taxable income then the amount of federal tax paid will be less.  So doesn't that have the same practical effect? 

[DGuller]

You misunderstand my point.  If state taxes are deducted from Federal taxes then why wouldn't States charge what they can to maximize local benefit at the expense of the Feds?  Is there a limit on the deduction?

State taxes are not deducted from federal taxes.  They are deducted from federal taxable income (i.e. you don't pay federal income tax on the money you send to the states - nor, in most states, vice-versa).

That is an important clarification.  But if the amount of state tax paid is deducted from federal taxable income then the amount of federal tax paid will be less.  So doesn't that have the same practical effect?

Didn't a number of people already point out the same thing? 

And yes, there is a practical difference between the Feds paying for 25% of the state tax and 100% of the state tax.  It seems fairly obvious. 

[crazy canuck]

You misunderstand my point.  If state taxes are deducted from Federal taxes then why wouldn't States charge what they can to maximize local benefit at the expense of the Feds?  Is there a limit on the deduction?

State taxes are not deducted from federal taxes.  They are deducted from federal taxable income (i.e. you don't pay federal income tax on the money you send to the states - nor, in most states, vice-versa).

That is an important clarification.  But if the amount of state tax paid is deducted from federal taxable income then the amount of federal tax paid will be less.  So doesn't that have the same practical effect?

Didn't a number of people already point out the same thing? 

And yes, there is a practical difference between the Feds paying for 25% of the state tax and 100% of the state tax.  It seems fairly obvious. 

Sure but that still doesn't answer my question.  Since the Feds are effectively subsidizing a portion of the State tax, why the race to bottom in States that could use that tax money?  Since those taxes are being paid in any event, why leave money on the table for the Feds?  I accept that at some point there are diminishing returns but this seems a good example of ideology getting in the way of good fiscal planning - at the State level anyway.

And from the Federal government's perspective, what do they get out of the arrangement?  Is this a taxation policy that is required by the US constitution or is it something the Federal level does voluntarily?

[DGuller]

Sure but that still doesn't answer my question.  Since the Feds are effectively subsidizing a portion of the State tax, why the race to bottom in States that could use that tax money? 

Just because someone is subsidizing something doesn't mean that you can immediately load up to the hilt with what is being subsidized.  Sometimes a subsidy is not enough to entice you to get any quantity regardless.  The state residents still have to pony up the majority of the state tax.

Since those taxes are being paid in any event, why leave money on the table for the Feds?

No, these taxes are "not being paid in any event".  If the state increases the tax rate, the state residents are going to pay more in taxes.  So most of these taxes are only going to be paid in the event the state raises its tax rate, not any event.

[Josquius]

Top tax rate of 9% ...... taxes are too high and scaring away the rich
Am I missing something here? 9% seems crazy low even for a normal person.

The state 9% rate is in addition to a marginal federal rate of 39.6% and a marginal medicare rate of 2.35%.

That's a relief

[Valmy]

Top tax rate of 9% ...... taxes are too high and scaring away the rich
Am I missing something here? 9% seems crazy low even for a normal person.

That is the State Income Tax on top of the Federal Income Tax (well not exactly because of how complicated the US tax structure is....)

[Berkut]

So Tim, income inequality is the problem here and not a tax structure that relies on screwing the rich?

What sort of tax structure would involve somebody who makes 6 billion dollars not paying millions in taxes?

The magical mystery tax code.

A state 9% top rate is pretty shitty.

Yeah, it was so shitty he was able to become a multi-billionaire while operating under that oh so onerous burden. Poor guy.

[Berkut]

So Tim, income inequality is the problem here and not a tax structure that relies on screwing the rich?

What sort of tax structure would involve somebody who makes 6 billion dollars not paying millions in taxes?

The magical mystery tax code.

0% income tax rate like Florida, if you define "taxes" as only income tax.
I suspect Florida has higher property taxes, maybe?

Florida has a crapload of tourism, and the state generates a lot of tax revenue on taxes of that tourism (hotels and such).

[viper37]

Top tax rate of 9% ...... taxes are too high and scaring away the rich
Am I missing something here? 9% seems crazy low even for a normal person.

That is the State Income Tax on top of the Federal Income Tax (well not exactly because of how complicated the US tax structure is....)

wouldn't it be simpler to reduce the tax rate and forget about the deduction?

[viper37]

So Tim, income inequality is the problem here and not a tax structure that relies on screwing the rich?

What sort of tax structure would involve somebody who makes 6 billion dollars not paying millions in taxes?

The magical mystery tax code.

0% income tax rate like Florida, if you define "taxes" as only income tax.
I suspect Florida has higher property taxes, maybe?

Florida has a crapload of tourism, and the state generates a lot of tax revenue on taxes of that tourism (hotels and such).

ah, I see my fellow Quebecers are not so adverse to taxes after all

[viper37]

So Tim, income inequality is the problem here and not a tax structure that relies on screwing the rich?

What sort of tax structure would involve somebody who makes 6 billion dollars not paying millions in taxes?

The magical mystery tax code.

A state 9% top rate is pretty shitty.

Yeah, it was so shitty he was able to become a multi-billionaire while operating under that oh so onerous burden. Poor guy.

He could be worth 6.5 billion if it wasn't of this unfair tax!

[Valmy]

wouldn't it be simpler to reduce the tax rate and forget about the deduction?

Yeah we keep trying to do that but people love their deductions.

[grumbler]

wouldn't it be simpler to reduce the tax rate and forget about the deduction?

Yeah we keep trying to do that but people love their deductions.

Not paying income taxes on the "income" you pay in taxes is not the most egregious of tax deductions.  Even countries that don't generally have much in the way of deductions often allow deductions for money paid elsewhere in taxes.  Now, being able to deduct for health insurance premiums, educational expenses, and home mortgage interest are a lot less defensible.

[MadImmortalMan]

The state sales taxes are also deductable, so whether states choose to tax income or sales the money left on the table issue is the same. Since most people probably take the standard deduction, it's probably better for the states to get their revenue from sales taxes since that method provides more revenue for government at both levels. (The standard deduction providing a window of non-offset in that case).

Edit: By that I mean a person can pay x amount of sales tax in a year before it begins to affect their federal taxable income via deduction, and most people rarely reach that amount.