Medicaid and the State and Local Government Tax Deduction: The Federal Government Re-Declares War on New York City, Joining the Rest of New York State and New York City’s Political/Union Class

The Republican tax plan includes a repeal of the federal income tax deduction for state and local income taxes, and a partial repeal of the deduction for local property taxes. The Economist magazine likes the idea.

Republicans have since come to view the state and local deduction as something that encourages big government, rather than deterring it. It subsidizes Democratic-leaning states that set their taxes high…States are surely capable of balancing their budgets without receiving a federal subsidy for doing so. There is no real justification for distorting their fiscal decisions one way or the other.”

There is one justification, though no politicians on either side have an incentive to point it out. Thus making the policies that really shift money, and the identify of the beneficiaries, once again the “unsaid.” One reason that high tax states are in fact high tax states is that the federal government drains money out of them. This deduction of state and local taxes from federal personal income taxes is sort of a partial make-good.

The key factor here is the federal share of Medicaid (and other social programs for the poor). As the cost of health care has grown, fewer and fewer private employers have paid for their employees’ health insurance, and the population has aged, the cost of this program has grown and grown. Spending on it accounts for a higher share of the personal income in may low-tax, Republican-voting states.


But the cost of it for state and (in New York) local taxpayers is much higher in high-tax, Democratic states, because of the federal matching share.…

Moreover, many in Red States have travel to high-tax places like New York State in general and NYC in particular when in need for expensive services, while living in low-tax places when they are not. Including poor people with mental health or addition problems washing up on city streets from elsewhere. And seniors who retire to low-tax Florida to avoid New York’s high taxes, but return when their money runs out and they need expensive custodial care. How does Florida spend so little on Medicaid-funded health care despite all those seniors? That’s how. They spend little on custodial care for such seniors and send many of them back when they need it, as does Arizona.

Will any New York politician propose at least tabulating the share of New York State social expenditures that are on those moving in from, or returning from, other states and which ones there are? Back when there was actual money spent on “welfare” for the poor, a tabulation I requested showed that just one-third of NYC households with public assistance income had been born in New York State.

Let me give two examples of the hit Medicaid makes on places like the Northeast. The federal share in New York is just 50 percent. To limit the hit to the state budget, NY state requires local governments to contribute as well. NYC has a local income tax, in addition to the state and federal income taxes. To “tax the rich” for “big government?” No. Half of it goes to the local share of Medicaid, with other programs for the poor — generally state-funded elsewhere — accounting for much of the rest.

One way for NY to increase its matching share? To become much poorer. That seems to be the goal of this proposal.

Michigan used to be one of those 50 percent states, and had much higher taxes than Tennessee as a result. Now they are about the same — after the auto industry relocated from Michigan to Tennessee, and Michigan collapsed into poverty.

Republicans don’t want to point on that low-tax Red States aren’t low tax because of “small government,” but because they are draining Blue States. But Democrats, who support such redistribution, don’t want to point it out either.

The same thing happens within states. NYC still has a nearly 20 percent poverty rate, but its better off pay half of all NY state income taxes. The state kicks back some of this money in municipal aid. Every locality, even the richest and most exclusive suburbs, gets it — except NYC — where college graduates can’t even afford their own apartment, let alone their own room, and subway services is collapsing. In fact, NYC pays a higher share of its Medicaid expenditures than the rest of New York State, a burden shift that politicians from the rest of New York are looking to make as bad as it could possibly be.…

It seems that every policy being proposed that isn’t intended to shift burdens from Generation Greed to the poorer generations to follow – and the deficit-increasing component of the Republican tax plan would – is intended to destroy the limited number of urban areas that federal policy didn’t finish off in the 1970s. The economic boom in these now-scarce viable urban areas seems to have outraged Republican politicians all over the country, and the retreat of the Republican Party from free market capitalism to anti-urban, anti-immigrant, anti-minority tribalism is a disaster for New York City. Because it takes away an alternative to the parasitic, entitled, self-serving political/union class here, the exploitive, abusive, socially unjust modern version of Tammany Hall.

Now which Blue State politicians is going to propose paying for tax cuts by cutting the federal matching share of Medicaid, particularly for services for seniors, in states currently over 50 percent? No one. But I think I just did. And by the way, is the high Medicaid spending in New York on children? Of course not.


Meanwhile, Mayor DeBlasio seems to want New York’s wealthiest to pay more in tax regardless of who benefits. So perhaps he will endorse this Republican proposal. Particularly since, from a public union and contractor perspective and to continue to receive their political backing, NY Democrats cannot accept that paying more and more in tax entitles those outside the political/union class to any additional services.

And because retired public employees do not pay any state and local income taxes on their pension income at all, and are thus unaffected by this proposal no matter how “rich” they are. In this chart the “Young Hopefuls” have $80,000 in work income, while the “senior voters” receive $132,500 in retroactively enhanced retirement benefits and other non-work income.

Chart 4

Want to know why Republicans from Upstate New York and the suburbs want property taxes to remain deductable, but not state and local income taxes? Because the “anti-government, hard working, tax-paying middle class” there now consists largely of those on the government tit, including many unionized public employees who are paid by the City of New York. They are against taxes, on themselves.  In fact, they propose the make all retirement income exempt from state and local government income taxes as well (much of it already is).  And the public employee unions are pushing to have pension income excluded from calculations of whether one is a “poor senior” eligible for enhanced property taxes as well.  It has been introduced the in the legislature over and over, and is just waiting for the right 3 am to pass.

And those special tax exemptions for public employees, those ongoing public employee pension increases, and term limits are what are behind New York’s political/union class opposition to a Constitutional Convention. They don’t just want their privileges, and their impact on everyone else, to remain unchanged. They want them un-discussed, so they don’t have to feel bad about them.

Just like those tax cuts down in Washington.  Not an actual tax cut.  Yet another huge tax deferral to the years when Generation Greed is not longer around, after taking everything they have promised themselves but refused to pay for.

With policies like these enacted over and over, it’s no wonder that I’m going to stick with my voting pattern of not voting for any Republicans at the federal level, on generational equity grounds, not voting for any Democrats at the local level, because of unfairness imposed on everyone else by the political/union class here, and not voting for any incumbents in the state legislature.

And I will be voting for a constitutional convention.

4 thoughts on “Medicaid and the State and Local Government Tax Deduction: The Federal Government Re-Declares War on New York City, Joining the Rest of New York State and New York City’s Political/Union Class

  1. electricangel

    You sound like a man after my own heart, Larry. I am in a similar situation. Using TurboTax, I’ve found myself to be in the combined 32% marginal bracket, meaning that additional dollars I earn are taxed at that rate plus payroll taxes, for an effective 48% marginal bracket. For all the hubbub about the corporate income tax, it’s only 15%of the first 50k in corporate income, and 25% of the next 25k. Since I am agnostic as to where I acquire wealth, working for my own C-Corp and taking advantage of deductions through that is the most effective strategy for me. You might note that you can set aside a good amount of the corporate income as contributions to a defined benefit plan.

    My bugaboo is paying SS taxes. So, since my wife earns over the SS maximum, we have me pay many of the small items that would otherwise come out pretax for her, but would only be pretax Medicare and Income, not SS. You’re writing at a high level of understanding so you probably already shift expenses within the family to take care of this. FWIW, you are an example of a HENRY: High earning, not rich yet, the class of coastal blue state salaryman whose taxes will rise under the plan. See Megan McArdle in Bloomberg.

    Since you own TurboTax, an exercise for you: take a married man, earning 10,000$ In salary. Now give him 80,000 in dividends. If you run this through TurboTax, you’ll find that his Federal income tax due is $0. He will owe NY State taxes, and also SS/Medicare on the 10k in salary, a total hit of about 5k, leaving about 7k per month in after-tax earnings. Enough to live in Brooklyn, maybe not Manhattan, if your non-working spouse plays “defense” with the income.

    Your next effort is to look up Subchapter T dividends, and then figure out how to make this “working man’s carried interest” work for you.

    1. larrylittlefield Post author

      Hey, somebody’s gotta be a serf and pay for Generation Greed, even if public services disappear. We don’t have any expenses to shift, we’re both W2 folks. Only additional income, if I chose to take it, would be freelance 1099, and it wouldn’t be enough to justify all the additional effort. Maybe if someone agreed to donate the money directly to a charity of my choice, or something.

      The rich rule the federal government. Unionized public employees rule NY State government. Two public retirees with $200,000 in combined pension, social security and a little other investment income would owe neither the payroll tax, nor ANY New York State or New York City income taxes. And the unions are working to get their pension and social security income exempted from calculations as to whether or not they are “poor seniors” under the STAR program, so they won’t have to pay much in property taxes either.

  2. electricangel

    Yes, but the AMT eliminates the state and local deduction for many if not most NYers. I’d love to see NY push for a proposal that no state get back more than 105% of what it sends to DC.

    1. larrylittlefield Post author

      You are right about that, and I forget to mention it.

      I don’t have a problem with helping people in poorer states. The problem is the hypocritical attitude of the politicians from there. And the unwillingness of our own politicians to call them out on it. “Effective government” is government that someone else pays for.

      Meanwhile, from time to time people offer to pay me to do some sort of analysis freelance. Under the Trump plan we would be in the 35 percent tax bracket based on our total income, and since I’m not the highest earner in the family, my entire salary and any additional money I earned are also subject to the 15 percent payroll tax. Probably a large share of metro New York’s workforce is in that situation.

      So the federal government would take 50 percent of anything I earned. Up from, you are right, 48 percent now, due to the AMT. I guess Trump wants to cut the marginal tax rate of business tycoons to 25 percent under his “pass through” proposal, but for many it’s only, what, 20 percent now?

      Then you have the state and local income tax. That’s another 11 percent, isn’t it? Right now the deduction still cuts that somewhat for some people, but under the proposal it wouldn’t. Then there is the MTA payroll tax, and the unincorporated business tax that I may or may not have to deal with on the extra money. But let’s just call it 61 percent for the government, and 39 percent for me.

      Except that if I decide to reward myself of earning the extra money by buying something, there is sales tax on that. That’s 8.875 percent of what’s left, or 3.35 percent of the initial sum. So now I’m down to getting just 35.65% of what I would be paid.

      Frankly, it isn’t much different from that now. And because of all the retroactive pension increases for public employees, still not being fully paid for, and the fact that those pensions are tax-free no matter how high their income is, you know NY taxes on those working are going to do up. And not just for $millionaires, who already pay a surcharge.

      Moreover, if I had self-employment income, I would have to upgrade to a more expensive version of Turbo Tax, keep all those additional records, and spend additional time dealing with Schedule C, income from a business.

      Just doesn’t pay, and isn’t worth the effort, relative to all the work I do on this blog for free.

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