A bipartisan group of lawmakers is asking the Trump administration to reconsider its support for ending the federal tax deduction for state and local taxes paid—the SALT deduction.
Good for them, although they certainly aren’t doing it for the right reason.
These lawmakers are concerned because Trump’s tax plan would “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers” while protecting just “the home ownership and charitable gift tax deductions.”
Representative Bill Pascrell (D-NJ) and Representative Leonard Lance (R-NJ) signed a bipartisan letter (along with 68 colleagues) to Treasury Secretary Steve Mnuchin protesting the administration’s plan to eliminate the deduction. It says in part:
While we welcome your efforts to streamline and modernize the Nation’s tax system, we were concerned to learn that your plan would eliminate the federal deduction for state and local taxes paid when taxpayers itemize their deductions each year
The elimination of this deduction unfairly penalizes residents in high-tax states like New York, California, Illinois, and New Jersey, where middle-class families can least afford another tax increase.
We hope you will reconsider this dramatic increase to the tax burden borne to families and homeowners in select high-cost states.
A couple of months ago, seven major organizations that represent state and local governments at the federal level (the National Governors Association, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, National Conference of State Legislatures and the Council of State Governments) sent a letter to all members of Congress urging them to preserve the state and local tax deduction along with the tax exemption for municipal bond interest. Then the organizations issued a press release echoing the same. It said in part:
We are extremely concerned that President Trump’s proposal includes eliminating the deductibility of state and local taxes.
The state and local tax deduction and tax-exempt municipal bonds were part of the original tax code in 1913 and have long served to meet critical needs in our communities. These essential components of the tax code support vital investments in infrastructure, public safety and education, encourage economic growth and provide states and local governments with the flexibility to deliver essential services to our residents.
We urge Congress to maintain the state and local deduction and the tax exemption for municipal bond interest. We will work with Congress to ensure that states and local governments have the tools we need to foster healthy, safe and vibrant communities.
According to the Tax Policy Center:
State and local income and real estate taxes make up the bulk of total state and local taxes deducted (about 60 percent and 35 percent, respectively), while sales taxes and personal property taxes account for the remainder.
State and local taxes have been deductible since the inception of the federal income tax in 1913. Initially, all state and local taxes not directly tied to a benefit were deductible against federal taxable income. In 1964, deductible taxes were limited to state and local property (real and personal property), income, general sales, and motor fuels taxes. Congress eliminated the deduction for taxes on motor fuels in 1978, and eliminated the deduction for general sales tax in 1986. It temporarily reinstated the sales tax deduction in 2004, allowing taxpayers to deduct either income taxes or sales taxes, but not both. Subsequent legislation made that provision permanent starting in 2015.
About one-third of tax filers opt to itemize deductions on their federal income tax returns, and almost all who do so claim a deduction for state and local taxes paid. Although taxpayers in every state claim the SALT deduction, those in states with a disproportional share of high-income taxpayers and relatively high state and local taxes (like Connecticut, Maryland, and New Jersey) are more likely to claim the deduction. The SALT deduction keeps almost $100 billion a year out of the hands of Uncle Sam.
This is why the SALT deduction—and the deductions for educator expenses, business expenses of performing artists, health savings accounts, moving expenses, self-employment tax paid, alimony paid, student loan interest, tuition and fees, domestic production activities, and (if you itemize deductions) medical and dental expenses, real estate taxes, personal property taxes, home mortgage interest, gifts to charity, mortgage insurance premiums, casualty or theft losses, unreimbursed employee expenses, union dues, and tax preparation fees—are so important. They all lower taxable income, which lowers the amount of taxes due no matter which tax bracket one is in.
Since there is no chance that the income tax will be eliminated or that the tax rates will return to their initial 1-7 percent, the importance of tax deductions cannot be overstated. Lowering or eliminating tax deductions has the same effect as raising tax rates: higher taxes. Any attempt by members of Congress—Democrat or Republican—to eliminate them should be seen as an attempt to raise taxes.
Tax deductions are not loopholes that need to be closed or subsidies that the government provides. Economist Murray Rothbard referred to these ideas as great economic myths, and wrote in chapter 2 of his Making Economic Sense:
A deduction or exemption is only a “loophole” if you assume that the government owns 100% of everyone’s income and that allowing some of that income to remain untaxed constitutes an irritating “loophole.” Allowing someone to keep some of his own income is neither a loophole nor a subsidy.
The members of Congress who want to keep in place this tax deduction are doing so because they will get an earful from their constituents if they help to do away with it. They do not want to keep intact the state and local tax deduction because taxation is theft, because all tax deductions should always be retained, because the government wastes most of the tax money it collects on non-constitutional spending, or because the government doesn’t have claim on anyone’s earnings. But what is important to American taxpayers is that Congress retains a tax deduction, not why it is retained.
Long live the state and local tax deduction!