Eliminate the State & Local Tax Deduction
The recently released details of the House version of tax reform show that Congress does not plan to repeal the state and local tax (SALT) deduction entirely, opting instead to retain the property tax deduction. Yet in the buildup to the release of tax reform legislation, writers in conservative outlets such as the Foundation for Economic Education and the Washington Examiner have been arguing that conservatives should support retaining SALT in its entirety. This is a mistaken viewpoint, one that is incompatible with conservative principles. The GOP House was wise not to heed it.
Conservative supporters of SALT often make that case that it upholds the principles of federalism, protecting local governments from interference by the federal government. Red Alert Politics editor Ron Meyer, for instance, argues that eliminating SALT would have the effect of “incentivizing smaller local governments,” reducing their revenues while boosting tax receipts to the federal government. Setting aside for the moment the fact that limiting SALT is part of a larger reform package to reduce overall tax rates, his analysis misunderstands the concept of “incentives.” SALT currently provides an incentive for state and local governments to levy higher taxes, eliminating SALT would only remove this incentive for local governments to overtax its citizens. SALT is a taxation issue, not a federalism issue.
Unfortunately, this incentive to hike taxes can prove significant enough to drive state policy. In Illinois, residents were forced to bear the burden of a 32 percent hike on their taxes because of the state’s unwillingness to tackle its growing pension funding problem. Tax increases did not solve this underlying spending problem, but it was politically expedient — in part because state lawmakers knew that the federal government would pick up part of the tab.
Yet SALT is about more than incentives. SALT is a tax break for wealthier Americans, with very few benefits flowing towards Americans with lower incomes. The National Taxpayers Union Foundation found that 91 percent of the benefits of the SALT deduction went to Americans with an adjusted gross income (AGI) over $75,000. Filers with an AGI under $40,000 (roughly the median AGI in the United States) received only 2 percent of the benefits.
Meyer refers to the county where he serves on the Board of Supervisors, Loudoun County, Virginia. Yet Loudoun County is the richest county in the United States. Given the distribution of SALT benefits, Meyer’s desire to defend the deduction is understandable. But that does not make it good policy. Tax reform should be focused on eliminating unnecessary deductions that flow primarily to the wealthiest Americans, not perpetuating them.
Most defenses of the SALT deduction also fail to acknowledge that tax reform makes changes other than just the elimination of one deduction. The SALT deduction would “cost” the federal government approximately $1.8 trillion in foregone revenue over 10 years. (Though if the property tax deduction is retained, about one-third of this revenue increase would not be realized.) That helps to fund bigger, better tax cuts for all Americans, not just the minority that itemizes their taxes.
It is crucial that tax reform benefits as broad a range of Americans as possible. Eliminating deductions that overwhelmingly benefit the wealthiest Americans in favor of broad-based tax cuts is a smart and fair way to pursue tax reform. Making the tax code work better for everyone requires eliminating tax breaks that only help a minority of Americans, including those that create perverse incentives for state and local governments to increase taxes. It’s time to get rid of the SALT deduction. The House GOP tax plan is a good first step.
Andrew Wilford is an Associate Policy Analyst at the National Taxpayers Union Foundation. Follow him on Twitter @PolicyWilford.