It is no secret the federal tax code is unbalanced and unfair. A byzantine network of deductions and carveouts favor some, while the remaining taxpayers foot the bill. The Tax Cuts and Jobs Act of 2017 (TCJA) made federal taxation fairer by limiting the amount of money taxpayers could claim under the “state and local tax (SALT) deduction” to $10,000 annually. Now, the Treasury Department has worked against that accomplishment by enacting a new rule that exempts certain businesses from the SALT deduction limit. While lowering tax burdens for businesses is generally good policy, policymakers should seek to lower rates rather than tweaking complicated deductions. Not only is the new Treasury rule less effective compared to policy alternatives, but it tilts the tax code to favor high-tax states.
Under the SALT deduction, taxpayers can deduct state taxes from their federal tax burden, which lowers their federal tax liability. While at first glance, that may seem like a good thing (less taxes is always good, right?), it’s actually a bad policy that effectively allows state governments to avoid the economic consequences of extractive tax policies by passing their federal tax burden off on more fiscally responsible states.
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