Charles Lane, who made his reputation by misrepresenting studies on Social Security Disability in the Washington Post, has apparently just discovered that states that vote Democratic also have higher state income taxes. While most folks knew this, Lane acts like Donald Trump passing around maps of the Electoral College vote to reporters; he thinks he has discovered something new.
He gleefully suggests that the Republican propose a tax reform that will end the deductibility of state income taxes and use the savings ($74 billion a year or 0.4 percent of GDP) for an enhanced Earned Income Tax Credit and a modest boost in infrastructure spending. Lane argues that this would pose a devastating problem for Democrats.
The point is that the current deduction means that the federal government effectively subsidizes 40 cents of every dollar that high income people in blue states pay in state income taxes. This makes it easier for them to raise taxes to pay for things like high quality Medicaid, pre-kindergarten, and child care. But Lane wants them to have to choose between an expanded EITC and modest boost in infrastructure and maintaining their spending in these areas. He thinks this is especially clever since it will look like they are protecting a tax break for the rich.
This is very cute, but let's see if we get cuter. How about two other reforms that would whack the blue states while making most of the population better off. Suppose we tried to nail the high rollers in the financial sector with a modest financial transactions tax? Representative Peter DeFazio proposed just such a measure yesterday. This would radically downsize the industry, by eliminating a vast amount of wasteful trading.
This would be a huge hit to the financial industry, primarily located in New York and other blue states. It would also raise more than $40 billion a year (other versions would raise more). Virtually all of this money comes out of the hide of the financial industry itself, since the cost of the tax would be fully offset by a reduction in trading volume, leaving trading costs for most investors unchanged.
For another route, how about publicly financed research for prescription drugs. This would allow new drugs for treating cancer, AIDS, and other diseases to be sold in a free market for a few hundred dollars rather than tens or even hundreds of thousands of dollars charged when drug companies have patent monopolies. While the folks during the research could still count on good salaries, the huge dividends earned by patent holders and pharma execs, who are overwhelming blue staters, would disappear. The benefits in lower drug prices could reach $400 billion a year, or more than 2.0 percent of GDP.
What do you say Mr. Lane? Here are some ways to really whack blue states while helping the low and middle income people that Democrats are supposed to care about. Are you in?
