Trump’s War Against Blue States

(Bloomberg Businessweek) -- Donald Trump has a powerful philosophy defining his ­presidency. That may surprise you. After all, it’s hard to see a consistent ideology in the areas where he claims to be winning big, as he likes to put it: taxes, trade, regulation, and health care.

It’s not populism, which he claims to espouse. His tax overhaul has mostly benefited the wealthy, studies show, spurring not higher wages but $679 billion in share buybacks in the first half of this year. By imposing tariffs on thousands of imports, he’s putting a regressive tax on the American consumer. He’s done what he can to undermine the Affordable Care Act, the result of which has been higher premiums for workers who depend on the program.

So what is his philosophy? Look again at the very same tax, trade, regulatory, and health-care policies, and a different pattern emerges. Check out the places they target. His tax overhaul has capped at $10,000 the federal income tax deduction that a homeowner can claim for payment of state and local taxes, affecting taxpayers especially severely in the Northeast and California. As part of his deregulation push, he wants to revoke a federal waiver that lets 13 left-­leaning states adopt tougher carbon-pollution standards. He proposes to unwind the fuel-economy standards that auto­makers agreed to work toward under a deal struck with President Barack Obama.

At the same time, Trump’s continuing efforts to undermine Obamacare will affect states that run their own health-­insurance markets under the act—most of them Democratic or trending that way. He also wants to ask about citizenship in the next census questionnaire, which will surely decrease participation in the decennial head count—and likely affect the size of the congressional delegations of states such as California, New York, Illinois, and Massachusetts.

Do you see the pattern? Trump is targeting America’s blue states—those whose voters are mostly liberal or lean left and choose Democrats in presidential elections. (The color coding has its origins in TV coverage of presidential elections.) He’s not just slapping down voters for sending Democrats to Washington. He’s waging war on an economic model that devotes greater resources to public education and a stronger social safety net; relies less on fossil fuels and encourages alternative energy sources; celebrates an urban lifestyle; and welcomes immigrants. The strategy may be working better than even Trump expected.

Blue-state antagonism comes through in his one real legislative victory, the 2017 tax rewrite. By capping state and local tax breaks at $10,000, Trump not only makes it more expensive for taxpayers to live in blue states, he’s shrinking the value of their retirement nest eggs—their homes.

In July four states—New York, New Jersey, Connecticut, and Maryland—sued the federal government, alleging that a blue-state mugging took place in December 2017 when Trump signed the law. The suit says the Republican-led Congress and the White House deliberately wrote the measure to target left-leaning states, interfering with their legal right to tax their residents.

The lawsuit is probably a long shot, but the states have a point: Because incomes are higher and homes generally more expensive in states along the coasts, taxes are also higher. That means the $10,000 cap is easily reached, even by ­middle-class homeowners. About 3 million California residents alone will hit it. New York has calculated the cost to its residents will be about $14 billion in the first year. For those living in West Virginia and Mississippi, $10,000 probably covers them.

The cap grew out of a misapprehension. Republican lawmakers took to the House floor to complain that the ability to deduct state and local taxes meant red-state taxpayers were subsidizing more affluent blue-state free-riders. The opposite is true: Many red states have low taxes because they rely heavily on federal aid and have relatively large low-income populations, says the Tax Foundation, a right-of-center policy group. More than 40 percent of Mississippi’s revenue comes from the federal government, for example. While Alabama, Kentucky, and South Carolina get more than $2 back for each $1 in taxes they send to Washington, New York gets 56¢ back and California gets 64¢.

Evidence is emerging that the tax law is having its intended effect. In high-end real estate markets in blue states, some homeowners are finding that buyers are increasingly holding back, often because they’re put off by the prospect of higher taxes, according to Bloomberg News. This is evident in Westchester County, a suburban enclave for New York City commuters. Home sales in the county, where the average resident paid $17,179 in property taxes last year, plunged 18 percent in the second quarter of 2018 from the same quarter in 2017. That was the fourth quarterly sales decline in a row—and the biggest one since 2011.

Other top-end markets in blue states, including Seattle and Silicon Valley, also seem headed for a slowdown in home sales. Of course, additional factors are at work, especially rising interest rates, the runup in home prices in recent years, and weak wage growth. But the national data all began pointing in the wrong direction just months after Trump signed the tax law: Existing-home sales dropped in June for a third straight month. New-home purchases are at their slowest pace in eight months. Housing inventories have begun to grow again, after declining for years. New York City is seeing falling real estate prices. It’s only likely to get worse next year. That’s when homeowners will file their 2018 taxes and for the first time feel the sting of the $10,000 limit.

New York and other states have tried to skirt the new tax law through such means as allowing residents to make tax-deductible donations to charities in exchange for tax credits equal to a percentage of the donations. But the IRS isn’t likely to allow these too-clever-by-half workarounds.

Trump’s tax cut is also making it difficult for blue states to fund their schools. Public education depends on property taxes for revenue. The National Education Association says that over the next decade the tax law will punch a $150 billion hole in school budgets. That puts about 130,000 education jobs at risk. California’s funding loss will come to about $35 billion, while New York’s will be about $31 billion.

The most recent blue-state assault took place in August when officials at the Environmental Protection Agency and the Department of Transportation proposed rules that would suspend the mandatory increases in fuel economy put in place under Obama. Under the new proposal, automakers’ fleets would have to hit only about 37 miles a gallon by 2021 on average, instead of about 47 miles per gallon by 2025.

Automakers had agreed to the stricter fuel-economy rules during the previous administration even though they were tough—and required Detroit to commercialize some technologies that existed only in labs. But the standards were widely supported by industry, labor, and environmental groups alike. Trump would unwind all that and also revoke a waiver that allowed California to set tougher tailpipe greenhouse-­gas standards.

His proposal would extinguish efforts by California and the 12 other blue states that follow its lead. Together they account for about one-third of U.S. auto sales. The stricter emissions regime is their way of attempting to moderate the effects of climate change, including the rising tides, hurricanes, droughts, wildfires, and floods that are hitting their states.

Trump is not merely reneging on the Obama deal, he could send automakers back to the pre-Obama era, when they faced two sets of emissions standards—unless the U.S. wins what will be an inevitable lawsuit over the 13 states’ right to exceed the federal rules.

At the same time, Trump is undermining blue-state investments in electric-vehicle charging stations, mass transit systems, and electric buses. Energy Innovation: Policy and Technology LLC, an economic consulting firm, estimates that the White House proposal will increase emissions by 11 percent and cost the U.S. economy $457 billion by 2050.

Trump officials say their proposal will result in less-­expensive cars (because fuel-sipping technologies can be costly), which means the national fleet will turn over faster, resulting in safer autos on the road and fewer highway deaths. And that will produce a $198 billion societywide savings for vehicles built between 1975 and 2029.

Nonsense, says Nic Lutsey, the director of the International Council on Clean Transportation’s electric-­vehicle and fuels work. He tells Bloomberg News: “There’s no evidence that efficiency regulations have depressed sales and added fatalities as a result—in any market in the world.” Anyway, whatever happened to states’ rights, once an ­article of faith among conservative lawmakers?

Trump, having been unable to persuade Congress to repeal Obamacare, is finding ways to subvert it. Of the 17 states (including the District of Columbia) that run their own insurance markets under the Affordable Care Act, 13 are blue or lean that way. One study found that those 17 marketplaces had been holding up better than the rest despite Trump’s relentless attacks, including his October 2017 pronouncement that “there’s no such thing as Obamacare anymore,” a month before the start of open enrollment.

The president has used his regulatory powers to let insurers sell skimpy, temporary policies that attract younger, healthier people. These plans tend to be cheaper, because they don’t have to cover needs such as maternity care, drug-abuse treatment, mental-health services, or cancer drugs. As a result, Obamacare-plan insurers are left covering an older and sicker population, forcing them to increase premiums.

Trump’s administration has also stopped paying the ACA law’s important cost-sharing subsidies. Such payments offset the expenses insurers incur for offering plans with smaller deductibles and out-of-pocket costs to lower-income people. More than half the 12 million people who have signed up for coverage through the exchanges benefit from these subsidies.

Trump’s effort to add a citizenship question to the 2020 census questionnaire, which could shift the balance of power for a generation, is yet another blue-state jab. Asking participants if they’re U.S. citizens will likely result in a lower head count, especially in blue states that have provided sanctuary to millions of undocumented immigrants, including those brought to the U.S. as children.

A lower state tally could translate into smaller population-­based federal grants, fewer seats in Congress, and a reduced Electoral College presence for at least the next two presidential elections. For these reasons, blue states are fighting to stop the citizenship question in federal court.

By law, the census is supposed to find out how many people live in the U.S., not how many citizens do. It’s right there in the Constitution, which requires the federal government to do an “actual enumeration” every 10 years. But asking about citizenship could cause millions of undocumented ­immigrants—and even some who are documented but reside with others who aren’t and fear exposing them—to recede into the shadows.

The Athenian historian Thucydides understood that people of common heritage but sharply different ideologies will develop interests that clash over time. He saw that developing between the Greek city-states: Athens was the cultural and philosophical center of the world in the fifth century B.C., while its neighbor Sparta, with its militarist culture, produced one of its most efficient armies. “What made war inevitable was the growth of Athenian power and the fear this caused in Sparta,” he wrote. The economic and cultural divide between red and blue states in America may be the Athens vs. Sparta for our times. —With Oshrat Carmiel, Prashant Gopal, Shobhana Chandra, and Ryan Beene

©2018 Bloomberg L.P.