Tax Plan Aims to Slay a Reagan Target: The Government Beast

President Ronald Reagan, with a replica of a federal income tax form, promoting his tax legislation in New Jersey in 1985.

It was the spring of 1985 when President Ronald Reagan first proposed to put an end to the state and local tax deduction. The idea was, to be sure, politically tricky. The provision had been around since the creation of the federal income tax in 1913, the budgetary expression of America’s celebrated federalism. As Justice Louis Brandeis might have put it, it was the federal government’s way to help pay for policy experimentation in the nation’s “laboratories of democracy.”

And yet to a Republican Party embroiled in a fundamental debate on how to shrink the government, it was an idea hard to resist: a direct shot at states’ capacity to spend. Bruce Bartlett, then a conservative tax expert who would go on to serve under Reagan and his successor, George Bush, estimated that without federal deductibility, state and local spending would fall 14 percent.

Nixing deductibility “threatens the political livelihood of spendthrift lawmakers across the nation,” Mr. Bartlett exulted at the time in an article for the Heritage Foundation. And it “would become more difficult for states to finance programs of doubtful benefit to their taxpayers by ‘hiding’ the full cost within the federal tax system.”

Reagan ultimately failed to kill the deduction. Mr. Bartlett, who often contributes to The New York Times, has come full circle to reject the Republican project to shrink the government at all costs. Still, his words from over 30 years ago provide an apt description of what drives Republican thinking in Congress today.

The entanglement of provisions in the Republican tax bills that emerged from the House and Senate in the last few weeks may look less like the product of a carefully considered strategy than like a hodgepodge of giveaways and compromises only loosely constrained by math or economics, clustered around one goal: cutting the tax burden on the rich.

But there is more strategic vision than is immediately evident. The plan to starve the beast of government by depriving it of money, it seems, is back in the saddle. This time around it might succeed where Reagan failed: Barring taxpayers from deducting state and local income taxes and limiting the property taxes they can deduct on their federal returns, the Republican bills could, for the first time, force high-tax states run by Democrats to capitulate.

Excluding payroll taxes — which pay for Social Security and Medicare — federal tax revenues declined to 11.2 percent of gross domestic product in 2016 from 12.1 percent in 1980, when Reagan was elected, according to the Organization for Economic Cooperation and Development, a policy group of industrialized nations. That is a difference worth some $170 billion a year, in today’s money.

This bucks the trend among the rest of the…

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