JAMES PIERESON: The Demise Of The Blue State Model.

The new tax legislation approved this week by Congress and to be signed by President Trump includes a provision that will cap the deduction for state and local taxes (SALT) at $10,000 per household. (Businesses will still be allowed to deduct those taxes as business expenses.) The other provisions of the tax bill—especially the corporate tax rate cut—should encourage investment in the United States and spur faster economic growth. But the cap on state and local deductions may be the most significant in terms of its potential political consequences. . . .

With the SALT cap in place, governors and legislators in those high tax states will find it more and more difficult to deal with their fiscal problems by raising taxes on wealthy taxpayers and business owners. In the wake of the 2008 financial meltdown, governors in Connecticut, New Jersey, Illinois, and California signed legislation to raise state taxes to deal with financial shortfalls instead of making the more difficult choice to reduce expenditures. This may prove impossible to do in the future, given the incentive that wealthy taxpayers now have to pack up and leave for friendlier tax climates.

To survive in a competitive universe, blue state governors and legislatures may have little choice but to reduce taxes and pare back public services and public employment—in other words, to abandon the blue state model.

This is assuming that they will respond rationally, which is not to be assumed.