At Daily Intel, I noticed the following:

I’m relieved to finally find a conservative willing to openly say that we should make federal tax policy without any regard to the impact of state and local taxes. But [Conn] Carroll offers no support for this idea, and it seems like a strange one. Suppose state and localities raised their revenue entirely from the very rich, the federal taxes were flat, or slightly regressive, and liberals complained that the rich were getting off easy. Wouldn’t the fact that the rich would be getting socked on their state and local taxes have some relevance? Is it really crazy to formulate a view with regards to how much different groups should pay to the government as a whole?
I’m inferring Carroll thinks the burden of state and local taxes, which falls more heavily on the poor than the rich, has nothing to do with the burden of federal taxes. Therefore we have to think about the distribution of federal taxes without taking state and local taxes into account. It would seem to follow that the reverse must be true — we have to consider state and local taxes on their own, without taking into account the impact of federal taxes. Does Carroll think it’s unfair that these taxes are so regressive, then? Should state and local governments cut taxes on the poor and raise them on the rich?

Why would we want to think about federal tax policy and state and local tax policy separately? I can’t really speak to Conn Carroll’s argument (and besides, he can defend himself just fine). I would like to raise some points that some of our interlocutors will undoubtedly find completely irrelevant and esoteric. That is my specialty.

Though federal spending is expected to increase markedly in coming decades, the real action in public spending has been at the state and local level, as Chris Papagianis recently observed:

Measured from the end of the Korean War (1953) to the year before the financial crisis (2007), federal spending had actually declined as a share of GDP, from 20.4% to 19.6%. Since the 1960s, federal spending has exhibited no persistent upward or downward trend. Periods of rising federal expenditure have been followed by periods of declining outlays, measured relative to GDP. The federal government has grown substantially over the entire period, of course, but this growth has been roughly in line with that of the overall U.S. economy. By contrast, over the past 60 years, state and local government expenditures have doubled as a share of the economy, from 7.7% of GDP in 1950 to 15.5% in 2009. Since 1950, state and local spending has grown at an 8.1% annual rate, fast enough to double the size of state and local government every 8 or 9 years. [Emphasis added]

Different state and local governments have embraced different strategies for how to pay for this increase in expenditures. Some have chosen to rely heavily on regressive consumption taxes. Others, like California, have relied more heavily on more progressive taxes. High-earners have tended to cluster in high-cost jurisdictions, many of which are also high-tax, e.g., California and New Jersey. One hypothesis as to why this has happened is that public workers in regions with fixed amenities, like an attractive climate or proximity to a productive urban core, are better able to extract rents from taxpayers. Basically, it is helpful to take a granular view of what is happening at the state and local level and why. (For example, efficiency really comes into sharp relief as an important way to manage the spending and tax burden, e.g., compare Massachusetts to New Jersey: the former has a tax burden in the middle of the pack nationally, despite the moronic “Taxachusetts” label, and high-quality public services when we adjust for demographic composition; the latter, in contrast, has a high tax burden and low-quality public services when we do the same.)

Another related issue is that at least some scholars have tentatively that regressive consumption taxes are actually a better way to finance public services than steeply progressive income taxes. Peter Lindert tentatively advanced this thesis in Growing Public, which The Economist discussed back in 2004:

The big European and Nordic welfare states are undoubtedly expensive. But their economic costs are held down by the perhaps surprisingly efficient tax systems with which they are financed. Once the means of finance are taken into account, they are also less redistributive than you might expect. …
In general, Europe’s big social spenders tax capital relatively lightly. On some measures, indeed, Europeans treat capital better than supposedly more sympathetic Americans. According to an OECD study, the grabbing hand of the American state took an average of 31% of capital income between 1991 and 1997. The corresponding figure was about 20% in Germany, Norway and Finland, and 24% in France. In 1998, rich Americans faced a marginal tax rate on dividends of over 46%. Rich Belgians, Finns and Norwegians paid much lower rates. While Americans were arguing about Reaganomics in the 1980s, Swedish households were enjoying a negative tax rate on capital income, once generous deductions and adjustments for inflation were taken into account.
This style of taxation is efficient, but it is clearly inequitable. Taxing luxuries less heavily than, say, alcohol is likely to be regressive. Suppliers of capital, who tend to be richer, get off lightly, while labour carries a heavier burden, through both lower net income and higher unemployment. The income and payroll taxes that support Europe’s large welfare states drive a deep wedge between a worker’s take-home wage and the much higher cost of employing him.

Suffice it to say, these trans-Atlantic divides have closed somewhat:

Mr Lindert, however, is keen to stress the other side of the tax-and-spend ledger. Returns to some of Europe’s social expenditures, such as child-care subsidies, are probably quite high, he says. He also claims, rather unkindly, that unemployment benefits and generous retirement schemes both “harvest lemons”—ie, they pluck the least productive out of the labour force. Discarding these workers subtracts little from the nation’s output, he argues; it also flatters the productivity figures of those with jobs.

Deep South states that have highly regressive tax burdens don’t closely resemble the northern European status quo, not least because they tend not to offer high-quality public services. But it’s worth mentioning that the progressive/regressive tradeoff isn’t quite as straightforward as is commonly understood.

Should the federal government care about how poor people and rich people sort across jurisdictions? In “The City as a Law and Economics Subject,” David Schleicher advances a provocative thesis:

This paper seeks to develop the framework for a modern law and economic method for analyzing local governmental law. Specifically, it claims that there is an inverse relationship between the gains from agglomeration and sorting. Having many small local governments, and enabling individuals to choose their local public policies by sorting among them, affects the organization and density of people in metropolitan areas, creating movement away from economically-optimal location decisions. Sorting thus reduces agglomerative efficiency. Similarly, the existence of agglomerative gains means that individuals are making location decisions for reasons other than matching their preferences for public policies. Agglomeration therefore causes a reduction in the efficiency of sorting.
States face a tradeoff between maximizing agglomerative and sorting efficiency in deciding how much power, and which responsibilities, to allocate to local governments. The need to balance these two conflicting sources of efficiency and changes in the nature of agglomerative gains over the last hundred years explains a great deal about the history of American local government law, current allocations of power between local governments and state legislatures, judicial decisions about local governmental power and the proper role for the federal government in policy areas, like housing and transportation, that are primarily regulated at the local level.

That is, the gains from Tiebout choice might be outweighed by the fact that Tiebout sorting lowers agglomerative efficiency. This raises interesting questions for how the federal government should interact with state and local governments. Should the federal government strive for neutrality across jurisdictions, or should it favor some over others? We’ll come back to this in a moment.

When the author of the Daily Intel post writes that he’s “relieved to finally find a conservative willing to openly say that we should make federal tax policy without any regard to the impact of state and local taxes,” I think he means to suggest that this view is likely to prove politically unpopular. During the 1976 Republican presidential primaries, Gerald Ford effectively blunted Ronald Reagan’s challenge by noting that devolving various federal functions to the state and local level would simply lead to a tax swap — your federal taxes might go down, but your state and local taxes would go up. The obvious rejoinder was that some states would deliver services more efficiently or not at all. But that rejoinder never took hold.

Regardless, I’d say that it’s almost a truism among conservative wonks that the state and local tax deduction subsidize high-tax, high-cost jurisdictions in a problematic way. Ramesh Ponnuru has written on this subject on numerous occasions:

The deduction for state and local tax payments, which is a subsidy from people in low-tax states to people in high-tax states, should go.

One potentially attractive aspect of this tax reform measure is that it would increase average — but not marginal — tax rates for the affluent. Interestingly, this measure would also make the federal government more neutral as to where people of different income levels cluster. It would force high-tax jurisdictions to internalize more of the cost of maintaining high taxes and high expenditure levels.

When we’re debating federal tax policy, including state and local taxes in our analysis might give us a somewhat misleading picture. That’s not because state and local taxes are unimportant. Rather, it all depends on the conversation we actually want to have. Do we want to talk about the appropriate distribution of the federal tax burden? Well, that’s one conversation. Do we want to talk about after-tax disposable income? Well, we might want to have a much broader conversation in that case — one that touches on expenditure cascades, decoupling education from traditional school districts, public sector reform, whether we need to encourage more residential mobility and discourage homeownership, etc. Taxes are a relatively small component of this complex picture.

Of course we’re not all going to want to talk about the same thing. If you believe, as I do, that many public sector institutions are not organized to deliver high-quality services in a cost-effective manner, you might think that it’s the only issue that matters. If you think that talk about public sector productivity is essentially a sideshow conjured up by racist cranks who hate taxes and their gullible patsies, well, you’re probably going to want to talk about how we must raise taxes on rich people. There are no mysteries here.