People in Texas pay taxes too. So do workers in Florida, Tennessee and other states that don’t impose an income tax. This has seemingly been forgotten in the ongoing debate about state and local taxes (SALT), and the deduction of those payments against federal taxes paid. It’s a reminder that when the Tax Cuts and Jobs Act (TCJA) was passed in 2017, individuals in low tax states similarly took a hit.
In return for low or zero rates of state income taxation, red state taxpayers frequently endure higher sales and property taxes. With the $10,000 deduction limit in the TCJA, red state earners lost an important deduction too, particularly the richest. This was and is problematic, and particularly in ways that would concern those in right-leaning red states.
Conservatives plainly prefer local government. It’s easier to keep track of inevitable political waste if the taxes and spending are local. SALT deductibility against federal taxes owed has long encouraged local governance that individuals could choose and watch closely.
As things stand now, and with conservatives oddly standing athwart an expanded SALT deduction with their allegedly 'Big, Beautiful' bill, the incentive is for taxpayers to more and more look to Washington for both spending and government itself. Why pay for local and state government if you can free ride on the federal government?
Some will point to deficits and debt run up by the federal government as the reason for keeping SALT deductibility low, but we’ve hopefully moved beyond such simplistic thinking. Year after year federal tax collections have risen, yet deficits and debt have soared.
If we’re being realistic, deficits and debt are a logical effect of soaring federal tax revenue now and in the future. As tax revenues grow, so grows the creditworthiness of the borrower. A shrunken SALT, even at the $40,000 level, will if anything enable even more federal borrowing. That is so because the richest taxpayers have far more than $40,000 to deduct, which means they'll still take a substantial hit nationwide from the Republican desire to not at all appear eager to reduce the tax burden on the individuals who pay most federal taxes: the rich.
Which raises an important question: since when do conservatives want more money flowing to the federal government? Blue states like California and New York have lots of rich taxpayers with a more casual attitude toward big government, and a certain benefit of SALT is that to some degree it keeps California in California, and New York in New York. Every dollar that doesn’t make its way to Washington is one less dollar of control that Congress has over the economy.
Lastly, it's useful to point out yet again that an unlimited SALT deduction would favor the rich. Yes, that’s a fairness and growth-oriented feature of the deduction. As conservatives have long pointed out, the top 1 percent of taxpayers account for 40 percent total federal tax revenues. SALT gives them a break that redounds to all of us as wealth that’s not taxed morphs into savings and investment.
As the Senate takes over the tax bill handed it by the House, including an expanded (though not nearly enough) SALT deduction, it’s important to remember that red state taxpayers suffered its shrinkage too, and at the expense of the federalism that so many red staters prize. More SALT would encourage more localized government at the expense of federal governance, which is why Congress should eventually bring back full deduction.
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