Illinois has heard a lot in the last few years about the raw deal it gets from the federal government. Annual taxes sent by this state to Washington run more than $12 billion ahead of the amount returned in all types of federal spending. That`s the worst imbalance among the 50 states, although Illinois is hardly the most flourishing state in the union.
Now, thanks to the backlash from President Reagan`s tax plan, Illinois residents are discovering that their subsidy to the rest of the nation is even bigger than $12 billion a year.
The President`s proposal to end the federal income tax deduction for state and local taxes has prompted howls from governors and mayors who used the deduction to push through their own tax increases. A number of states with graduated income taxes have set their top rates at sky-high levels because they can tell upper-income families that it really doesn`t hurt that much;
deduct that state tax from your federal taxable income, and you`re only paying about half that amount, right?
The federal tax break enabled Minnesota to go as high as 16 percent on its state income tax, New York to 14 percent, Wisconsin to 10 percent.
In effect, this has meant that the taxpayers of Illinois, where the state personal income tax is a flat, low 2.5 percent, are helping to provide tax deductions for residents of less frugal states. Or look at it this way: A portion of the federal tax dollars paid by the people of Illinois pays for state services in Minnesota, New York and other high-tax states.
A study by Arthur Andersen & Co. compared the impact of President Reagan`s tax plan in various states on a family with a taxable income of $50,000 a year living in a house worth $97,000. In Wisconsin, this family`s total taxes would fall only 3 percent under the Reagan plan–the smallest drop in the country. In Minnesota, the family`s taxes would fall 4 percent. In New York, 5 percent. In Michigan, 6 percent.
But in Illinois, this family`s total taxes would fall almost 13 percent. That`s one of the biggest savings of any industrialized state. And, according to the Andersen study, it is attributable to the Reagan proposal to end the federal deduction for state and local taxes combined with the proposal to lower tax rates.
Gov. Mario Cuomo of New York argues that the President`s plan would intensify divisions between rich states and poor states, the ones burdened with heavy welfare costs and a shrinking tax base. It`s true that current law does narrow the tax differences among states, with residents of high-tax states using the tax deduction to lower their federal taxes. But current law also masks the real costs of state and local government. It provides a hefty, indirect federal subsidy that acts as a disincentive to hold down state and local budgets while driving up the federal deficit.
The state-and-local tax deduction will cost the federal treasury about $32 billion this year, and the figure has been rising steadily.
Gov. Cuomo is right, though, when he complains that welfare costs are an unfair burden to states compassionate enough to give subsistence-level benefits rather than the starvation levels of some Southern states. The heavy concentration of welfare families in big Northern cities does bleed state and local governments. But that problem should be corrected through national standards for welfare benefits and through policies that will cut welfare rolls, including early childhood education.
