Perhaps unknowingly, residents of low-income tax states have been subsidizing wealthy residents of high-income tax states for years through the federal tax code. The culprit is the state and local tax deduction, often referred to as the SALT deduction, even though sodium has nothing to do with it.
The Republican tax reform framework released at the end of September had much to love and some to be improved on. As it turns into a formal bill that hopefully moves swiftly through Congress under regular order, Republicans should resist the salty temptations of lobbyists and wean the country off the state and local tax deduction.
For decades, the SALT deduction has encouraged liberal states to raise their taxes without making their taxpayers feel they’re actually paying more. When state income taxes rise, taxpayers are simply able to deduct it from their federal taxes to offset.
Unfortunately, the SALT addiction is starting to spread to typically Republican states as well. In Alaska, Gov. Bill Walker (an independent but a Republican before 2014), specifically cited the SALT deduction in his 2016 proposal to raise taxes: “We selected an income tax over a sales tax for a couple of reasons. … State income taxes are deductible from your federal taxes.”
In terms of the federal budget, as the Tax Foundation says, “Because this deduction reduces taxable incomes substantially, it also reduces federal revenues significantly.” Ending the deduction means it can help pay for reduced taxes across the board without adding to the deficit. Rough estimates show Congress will need to find $5 trillion over a decade to help fund the tax cuts. Hopefully, much of that can be found through spending cuts and the elimination of other unnecessary credits and deductions. But eliminating SALT would raise approximately $1.7 trillion over 10 years. Even if it were phased out instead of immediately eliminated, it would substantially fund larger tax cuts.
Democrats, desperate to attack the GOP tax framework from any angle they can find, claim the SALT deduction is crucial for low-income families. House Minority Leader Nancy Pelosi, D-Calif, tweeted Thursday, “50% of households that claim State & Local Tax deduction make under $100K – & now @SpeakerRyan wants to throw it away.” But with the doubling of the standard deduction proposed in the GOP tax reform framework, fewer low-income households are likely to itemize and claim the deduction anyway. Even under the status quo, only 1 percent of the total value claimed in the deduction nationwide was claimed by taxpayers earning less than $50,000.
The SALT deduction is actually quite a large hand-out to the wealthy. In fact, it’s arguably the biggest handout in the tax code for high-income earners. According to the Tax Foundation, households that made more than $200,000 a year in 2014 (the latest year of data available) collectively claimed $243 billion in the SALT deduction. That’s more than twice as much as any other deduction in the tax code (the second-highest was $108 billion claimed from the charitable deduction, which we’re fond of).
Supporters of the deduction need not have salt rubbed in their wounds. Rather than immediately ending it once and for all, the deduction should be phased out. Many people made important financial decisions about where to live knowing they’d get this tax break, and it could hurt them if they were forced to quit SALT cold turkey.
No longer should taxpayers wise enough to elect conservative, limited-government politicians to their state houses be forced to play chump to those who vote for tax-and-spend liberals. Kick SALT out of the tax code’s diet once and for all.
