It used to be the case that if you lived in a high tax location, if you fully itemized your return, your local taxes were deductible from the income that your federal income taxes then applied to. This was a subsidy from low tax to high tax states and localities.
But because it only makes sense for the richer among us to itemize their returns fully, this State and Local Tax, or SALT, subsidy lessened the impact that government imposes upon richer people. Replacing this tax with a standardized deduction, as President Donald Trump’s reforms did, was thus an improvement in our taxation system.
The current impulse seems to be to abolish this good sense and move back to the old system. One think tank, the Center on Budget and Priorities, estimates half of all SALT’s benefits go to the top 1% of earners, and 80% of the benefits go to the top 5%. Returning to SALT would also make the economy less efficient.
The obvious question thus follows: Why is restoring SALT so popular in certain political corners?
The answer is that some local polities like being high tax places. That’s fine on paper, of course. Different groups of people get to play out life in 50 laboratories of democracy. The problem for politicians in these places, however, is that they find a certain voter resistance to quite as much revenue as they desire to extract. The SALT tax break lessens the impact of high state and local taxes and thus reduces the flood to state borders. It is a subsidy to progressive paradises such as California and New York.
It’s entirely true that the tax code is riddled with all sorts of absurdities. Louis Goffinet is being charged $16,000 in taxes because he raised funds to buy his neighbors groceries during lockdown. But the issue of rich folks not staying put to be fleeced by local politicians unless they’re given a tax break? Why should that be a problem for the rest of us? Why not instead limit how much fleecing local politicians can do?
Mencken’s aphorism, that democracy is the theory that the common people know what they want, and deserve to get it good and hard, applies to local as much as national politics. It also applies to rich liberals in progressive places. Why should they be let off the bill for the governments they vote for? Limiting the SALT deduction was one of the impressively good things of the Trump years. Let’s keep it.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
