As House Republicans continue to struggle to pick a Speaker, there’s talk about selling out one of the most important elements of the landmark 2017 tax reform law to gain support. But while raising the cap on the state and local tax (SALT) deduction might buy the support of a few blue-state Republicans, it would do so at the expense of average taxpayers around the country.
Under the 2017 tax reform law, the maximum SALT deduction that could be claimed on a return was capped at $10,000, regardless of filing status. Rep. Jim Jordan reportedly offered Republicans from high-tax states an increase in the cap to $20,000 for single filers and $40,000 for married filers. That proposal is shortsighted and, from a conservative tax policy perspective, would represent a self-inflicted wound.
The SALT deduction overwhelmingly benefits the wealthiest taxpayers (most taxpayers simply claim the standard deduction and are ineligible for the SALT deduction). Raising the cap would be no different — according to the Tax Foundation, only among taxpayers making $100,000 or more would even 10 percent receive a tax cut. After all, most average taxpayers don’t even have $10,000 worth of state and local taxes to deduct in the first place, even in the highest-tax states.
Of course, the fact that a tax deduction benefits wealthier taxpayers is not on its own a reason to oppose it. Wealthy taxpayers pay more in our progressive tax system and are therefore more likely to benefit from tax deductions. Well-crafted tax deductions can benefit the wealthy but also encourage the productive investments that are needed to power our economy.
The SALT deduction, unfortunately, does none of that. Its existence (and the fact that high-tax states have fought tooth and nail against efforts to cap it) is due to the fact that it provides high-tax states with a shield against the ire of their overtaxed residents — and, consequently, an incentive to pursue tax-and-spend policies.
Say New York wants to raise taxes on a given wealthy resident by $100,000. With the SALT deduction, that taxpayer can then turn around and deduct that $100,000 tax increase on their federal income tax return, reducing their total tax burden by $37,000 (the top marginal federal income tax rate is 37 percent). In effect, a New York tax increase of $100,000 only actually costs this taxpayer $63,000.
Now, that doesn’t mean this taxpayer will appreciate the overall tax increase. But it does mean that the tax increase will have 37 percent less impact on their wallet and be 37 percent less odious. This makes the taxpayer marginally less likely to get fed up and leave for Florida — the only consequence preventing New York from taxing this taxpayer to kingdom come.
Some conservatives have argued that if New Yorkers and Californians want these policies, “they should feel free to pay for it.” But that’s exactly the point — SALT doesn’t allow New Yorkers and Californians to pay for their spending, it foists the responsibility off to the federal government, which is in turn funded by taxpayers around the country.
In some sense this takes the form of new debt and obligations to future taxpayers, but even our debt-addicted government needs some revenue. Consequently, a raised SALT cap — estimated by the Tax Foundation to cost over $50 billion over the next two years — would necessarily crowd out other, beneficial tax reforms. To trade the ability to extend pro-growth policies like full expensing, for instance, for a tax break that encourages states to raise their taxes is about as bad a trade as it gets.
Taxpayers should be outraged at this blatant attempt at political horse trading, offering to sell out taxpayers around the country in return for the support of a few representatives of states unwilling to accept the consequences of their tax-and-spend policies. Republicans running for Speaker should know to leave the SALT on the kitchen table where it belongs.
