SALT Deductibility, Hypocrisy and Good Government

Gary M. Galles  – October 6, 2021 @ American Institute for Economic Research

The Trump tax reform imposed a $10,000 ceiling on state and local tax (SALT) itemized deductions for federal income taxes, paired with a doubling in the standard deduction. Ever since, Democrats with higher income residents and higher state and local taxes have been pushing to undo the SALT cap (while ignoring the benefits of the standard deduction expansion, which were far more balanced across citizens).

Governors of high tax blue states have opposed the SALT limit because “the cap on SALT deductions established a system of double taxation, where 11 million Americans were forced to pay taxes on the amount they paid in State, local, and property taxes,” according to six Democratic governors writing in April. Ways and Means Committee member Rep. Bill Pascrell (D-NJ) called it “critical middle-class relief,” asserting that “SALT benefits flow to all communities.” Now a group of congressional Democrats is threatening to hold the latest mega-tax-and-spend proposal hostage to get what they want.

The campaign turns a deaf ear to the hypocrisy of Democrats wanting to give tens of billions of dollars of federal tax expenditures to a very lopsidedly high-income group, while pushing a punish-the-rich tax proposal justified as making them pay their “fair share.” But what is more important, and has received even less discussion, is that SALT deductibility does not follow from “good government” principles...............

SALT deductibility does create serious issues, however. SALT was the largest itemized deduction, allowing itemizers to export a substantial portion of their burdens onto other Americans through the federal tax code. If I faced a 30percent federal marginal tax rate, paying $100 more in SALT lowers my federal tax bill by $30. It only costs me $70. Because that subsidy rises the more property is owned and the higher the income of the owner, the distortion overwhelmingly favors the richest, with the middle-class (who own less property, earn less, and face lower marginal tax rates) getting far smaller benefits, and non-itemizers getting no subsidy at all. In the process, it also subsidizes high state and local tax states at others’ expense.............To Read More.....