A certain irony surrounds the scheduled explosion of tax liability under the Alternative Minimum Tax. Namely, this is a “Blue State tax,” with the heaviest concentrations of affected taxpayers living in states that voted for John Kerry in the 2004 presidential election, including New York, California, Illinois, Connecticut, New Jersey and Maryland.
But they’ve got more than the AMT to worry about. A new Heritage Foundation study examines the economic effects of allowing the 2001 and 2003 rounds of tax relief to expire, and it turns out this other imminent increase in the nation’s tax burden also hits Blue State taxpayers the hardest.
Within weeks, lawmakers will likely approve a 2008 budget blueprint that stacks the deck in favor of a massive $900 billion-plus tax increase over the next decade. The new budget rule known as PAY-GO requires supermajorities of lawmakers to approve even simple extensions of current tax law, a near impossibility in the current environment. If lawmakers seek to extend some of Bush’s most politically popular tax breaks, such as the children’s tax credit and marriage penalty relief, PAY-GO requires offsetting tax hikes on other taxpayers, dollar for dollar.
Either way, an unprecedented increase in the average taxpayer’s tax burden is coming.
Democratic political operatives may want to scrutinize the Heritage analysis closely given that this increase in the tax burden will impose the greatest pain on their own constituents.
Twelve of the 15 states where taxpayers face the largest increase — from $3,000 per taxpaying household per year in Delaware to more than $4,300 in Connecticut — are Blue States. Voters in these states not only voted for Kerry, but also sent overwhelmingly Democratic delegations to Congress. In the Senate, the margin is 21 Democrats (plus Independent Joe Lieberman of Connecticut) to only eight Republicans; in the House, Democrats from these states outnumber Republicans, 124-87. Should these increases occur, lawmakers in these states and districts should expect to hear from some angry constituents.
By contrast, 14 of the 15 least affected states — where the projected increase in the tax burden ranges between $2,261 per household in Mississippi to just under $2,700 in North Carolina — are Red States. Taxpayers in these states, on average, are far less likely to report capital gains realizations or dividends on their tax returns. Because they earn less, they’re also far less likely to fall into the highest marginal tax brackets. It may surprise some to learn that these poor states tend to elect Republicans. In the Senate, 19 Republicans and only 11 Democrats represent these states; in the House, Republicans outnumber Democrats 35 to 28.
In the House, the taxpayers who face the most gruesome tax increases live, almost without exception, in the inner suburbs surrounding some of our largest metropolitan areas, including New York City, Chicago, Los Angeles, Washington, San Francisco, Denver, Atlanta, St. Louis and Philadelphia. They face increases ranging from $4,400 per household per year in Rep. Elton Gallegly’s (R-Calif.) Ventura County district to more than $5,000 per household per year in a dozen unfortunate districts. Leading the hit parade are the Nassau County constituents of Rep. Peter King (R-N.Y.). They will be asked to shoulder an increase in their tax burdens of an astounding $5,740 per year.
The study uncovered another dynamic — an unexpected economic relationship between Red and Blue States. The investor class lives and works in the affluent, Blue State suburbs, where wages are higher and investment portfolios more common. The jobs their investments create, however, tend to be located in high-growth, Red State areas. A higher tax burden leaves the investor class with fewer after-tax dollars to invest — hurting firms in high-growth regions and causing workers to lose jobs.
Consider how job losses would be distributed. Only four of the 25 districts hit hardest with the increased tax burden also rank among the 25 with the heaviest job losses. But 18 of the 25 with the greatest job losses are in Red States — including communities that anchor rapidly growing regional economies in metropolitan areas, such as Las Vegas, Dallas-Fort Worth, Atlanta, Salt Lake City and Mesa, Ariz.
This prompts a question: If the Republican Party is the “party of the rich,” why do so many of the wealthiest Americans live in Democratic-controlled states and districts?