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The Journal Gazette

Thursday, November 02, 2017 1:00 am

Regional inequities fuel tax debate tension

Bruce J. Schulman

Bruce J. Schulman is Huntington professor of history at Boston University and the author of “The Seventies.” He wrote this for the Washington Post.

As congressional Republicans prepare their tax-cut bill, the deduction for state and local taxes (SALT) has become a flash point. Last week, the Senate approved an amendment to abolish the deduction, which especially would benefit residents of states with stiffer state tax bills and higher property values.

Hailing elimination as a tool to offset some of the huge rate cuts Republicans seek on corporate incomes and high earners, House Speaker Paul Ryan, R-Wisconsin, asserted that SALT unfairly subsidizes “big government states” and creates a situation in which “states that actually got their act together pay for states that didn't.”

Defenders of the deduction, including Republicans from states such as New York and New Jersey, counter that even after the deduction, their states pay far more in federal taxes than they receive in federal spending. By that standard, wealthy populous blue states subsidize less developed, mostly red states. South Carolina, for example, despite its long history of opposition to the federal government, takes nearly $4 in federal spending for every dollar its citizens pay in federal taxes.

At its core, the debate over the SALT deduction reflects a fundamental disagreement about the nature of American public life. Are the states “with their acts together” the ones that keep taxes lowest or the ones that provide good schools, safe roads, the best job opportunities and the highest incomes?

The Constitution built these tensions into the nation's DNA: creating separate houses of Congress, protecting the interests of slaveholders, providing for federal control over western lands. But not until the New Deal did government outlays reach anything like modern levels (as a percentage of gross domestic product), and not until World War II did the federal income tax affect most Americans.

But as federal spending surged, the parameters of that competition began to change. In the 1940s and 1950s, representatives of the nation's poorer sections, led by southern members of Congress, reframed their historic antipathy to federal involvement in their affairs and challenged the traditional pattern for apportioning federal spending.

Before World War II, federal grants favored larger, wealthier, more urban states. By distributing funding on the basis of population and requiring states to match federal contributions, grant programs discriminated in favor of the haves. As federal spending took off in the 1930s, southerners pushed to reform the system to bring more federal aid to their region. New formulas gradually found their way into many federal programs. Such provisions became so prevalent that, by 1962, the relationship between state income and grants slightly favored poorer regions. Highway construction likewise benefited less developed, low-tax states.

The flood of federal money into the emerging Sunbelt – provided by states in the Northeast and the industrial Midwest, the regions that paid the most federal taxes – grew so pronounced that it became the subject of heated debate during the 1970s. The Sunbelt boomed while the old industrial heartland faced almost catastrophic decline. Northern leaders blamed the decline of the Rust Belt on the imbalance in the distribution of federal development money.

This battle was fought not over slavery but over government largesse. And it was a high-stakes fight, with the health of vast regions at risk. If federal spending was not redirected northward and the decline of the Rust Belt reversed, it would become, in the words of New York Gov. Hugh Carey, “a great national museum” where tourists would “see industrial plants as artifacts” and visit “the great railroad stations where the trains used to run.” (If that seems like an exaggeration, then you've never visited New York's South Street Seaport or St. Louis's Union Station.)

The grievances peaked in the mid-1970s when Carey and his colleagues in northern states formed the Coalition of Northeast Governors to lobby Washington for more generous aid. At the same time, the Midwest-Northeast Economic Advancement Coalition, a caucus of about 200 House members, formed with the goal of redirecting federal money north. “Like blacks, Hispanics, women and homosexuals,” one New Yorker complained in 1976, “Northeasterners are an oppressed minority. We are only beginning to realize how badly the federal government discriminates against us.”

Silly as it was, that comment contained an essential truth. For 80 years, residents of populous, high-tax (and today mostly blue) states have subsidized their fellow citizens in lower-income, lower-tax (and today mostly red) states. Ryan and other advocates of SALT elimination portray the deduction as an unfair burden imposed by spendthrift regions on better functioning states. But in fact, Republicans' plan to eliminate the deduction is the latest battleground in this long-running regional conflict over the federal balance of payments – one that has, paradoxically, showered federal largesse most lavishly on opponents of big government.