Blue States to Get Higher Taxes They Voted For

Joel Kotkin at Forbes:

With their enthusiastic backing of President Obama and the Democratic Party on Election Day, the bluest parts of America may have embraced a program utterly at odds with their economic self-interest....Any move to raise taxes on the rich — defined as households making over $250,000 annually — strikes directly at the economies of these states, which depend heavily on the earnings of high-income professionals, entrepreneurs and technical workers....The top 10 states with the largest percentage of “rich” households under the Obama formula include true blue bastions Washington, D.C., which has the highest concentration of big earners, Connecticut, New Jersey, Maryland, Massachusetts, New York, California and Hawaii. The only historic “swing state” in the top six is Virginia, due largely to the presence of the affluent suburbs of the capital.

...Big metro areas supported Obama, particularly their core cities, by margins as high as four to one. Besides New York, the metro areas with the highest percentage of high-earning households include such lockstep blue cities as San Francisco, Washington, San Jose, Atlanta and Los Angeles.

...Of course, one can argue that these changes follow the precepts of social justice: Rich people and rich regions should pay more. Yet being “rich” means different things in different places, due to vast differences in costs of living. The cost of living in New York and Los Angeles, for example, is so high that the adjusted value of salaries rank in the bottom fifth in the nation. In other words, a couple with two children with a $150,000 income in Austin or Raleigh may be, in terms of housing and personal consumption, far “richer” than one making twice that in New York or Los Angeles.

From this, the GOP could conceivably propose a “tax Blue America” plan:

* Keep the tax rate on capital gains the same.
* Raise income taxes on the top income bracket for 2013, those making $398,350 and up (single filers, married joint filers, or head of household).
* Means-test, or eliminate entirely, the mortgage-interest deduction (which benefits taxpayers in areas with the highest real-estate values and mortgages — i.e., Hawaii, D.C., New York, California, and Connecticut).
* Means-test or eliminate entirely the federal deduction of state and local taxes, which is disproportionately utilized by those in high-tax blue states: “In 2005, taxpayers in California and New York together made up 20 percent of those claiming the deduction and accounted for 30 percent of its value. Itemizers in New York, New Jersey, Connecticut, and California claimed on average over $12,000 per household.”

...Geraghty is right that the state and local tax deduction primarily benefits residents of blue states since blue states have high taxes, and so does the mortgage interest tax deduction because blue states have expensive houses.

I think this is a fine idea, but I'm especially enthusiastic about the mortgage part. Suppose homeowners in expensive coastal cities couldn't deduct their mortgage interest, what would happen? Well, what would happen is that prices would fall. But nothing more dramatic than that. All the deduction does is encourage further bidding up of the price. In a normal market, that bidding up of the price might lead to additional construction. But the main reason those blue metro areas have such expensive houses is that zoning doesn't allow demand to be matched with supply. No matter how expensive Georgetown or Harvard Square or Park Avenue gets they're not demolishing the existing structures and replacing them with much larger ones. So you'd get some extra tax revenue this way with no real change in the amount of underlying economic activity.