Abolish the SALT Deduction
and most other federal tax deductions, if we're being honest
Recently, a bunch of suburban members of congress re-launched the Congressional SALT Caucus, a group that broadly supports lifting or greatly increasing the cap on the deductibility of state and local taxes. The members span the political spectrum, from election denier Mike Garcia to progressive stalwart Katie Porter. Unfortunately, it is a very, very bad idea.
In no uncertain terms, repealing or increasing the cap on the deductibility of state and local taxes would be an extremely regressive transfer to the richest Americans, greatly increase regional and national inequality, and crowd out a great number of important federal transfers to actually poor Americans.
Background
When reporting your income tax, you are able to take a variety of deductions that essentially reduce the reported income that is subject to progressive marginal tax rates. For example, if I have an income of $150K, and I donate $15K to charity and take that deduction, the federal government taxes me on $135K with the marginal rate structure — when you “enter” a new tax bracket, the income above the tax bracket threshold is taxed at that rate, not the entirety of your income.
Some common examples of tax deductions are interest on mortgages, charity contributions, and the standard deduction (which is basically a general purpose deduction for when you don’t want to list all the deductions you are taking). All the non-standard deduction tax deductions are known as “itemized deductions,” and the particular itemized tax deduction we are looking at today is the State and Local Tax (SALT) deduction.
When the income tax was first introduced after the 16th amendment, state and local taxes were fully deductible from federal taxes — however, at this point in time, federal tax receipts were very low and so were state and local tax receipts. With the advent of the modern welfare state, the federal government’s tax receipts grew, but state and local taxes remained deductible.
In 2017, the Tax Cuts and Jobs Act was passed, and with it a cap on the SALT deduction, meaning that single or joint filers could only deduct $10,000 of the state and local taxes paid. Into the Biden administration, a group of suburban members of congress grouped up to form the SALT caucus to advocate for lifting the cap or removing it entirely, with a couple of premises:
That the SALT deduction cap was “meant” to punish higher-tax, higher-service Democratic-leaning states, and is leading to a reduction in services as a result.
That the SALT deduction cap disproportionately hits middle class people.
I’m going to break these down one by one, as well as some other objections that are brought up in favor of removing the SALT cap:
The SALT deduction cap was designed to punish blue states and is driving migration away from them.
All else equal, this would make sense — after all, if you have a higher tax rate in, say, Connecticut or New York than in Florida or Virginia because you cannot fully deduct state and local taxes, then there would be some number of people considering moving. However, we do not have everything else equal.
If we are looking simply at the costs borne by the resident, including state and local taxes, we would see that other factors greatly outweigh tax rates — for example, a fair amount of interstate migration post-SALT cap has been between high tax states, and much net internal migration in California has been of high income people, not low income people.
The simple matter is that housing costs determine where people migrate (with major consequences), not simply taxes, and the SALT deduction can be counterproductive in this regard (more on this later).
The SALT deduction cap hurts middle class people, and repealing it would provide needed tax relief for middle class families.
No:
To round off, here are some more objections:
It’s double taxation
People pay for local, state, and federal services, so you are also receiving double services in exchange for “double taxation.”
People living modest lives in high cost of living states will still hit the SALT cap, and have greater expenses on their mortgages/rent too.
I agree that we need more housing to bring down rents in high cost of living states. However, the SALT deduction does not help in this regard — one of the largest line items among state/local taxes is property tax — by reducing the holding costs of expensive housing, the SALT deduction subsidizes opportunity hoarding.
I don’t want my rich blue state to subsidize poor red states.
States don’t pay taxes, people pay taxes — poor states generally have poorer people, meaning they are more likely to have a larger population that benefits from welfare transfer programs.
Additionally, every state is a net beneficiary, because the federal government recently ran a large deficit because of the large expansion of the welfare state during COVID.
Finally, states are largely arbitrary — if we created a state out of the rich, economically productive parts of Texas, then it would have a net positive balance of payments, even though it currently does not.
Can’t we increase marginal tax rates to make up for the SALT Deduction?
Sure, we can increase marginal tax rates, but after a certain point, you’ll end up with a large number of rich people lobbying to implement various deductions — like the SALT deduction — that render the marginal tax rates largely moot. Even as top marginal tax rates have changed over time (from around the mid-90s percent to now around 37%), the actual percentage of GDP that the US government takes in taxes has stayed roughly around 15–20%
Additionally, regressive transfers such as the SALT deduction would ideally be better spent on programs such as the child tax credit (which sadly died after 2021) or investments in improving public housing.
Don’t many people reach the 10,000 dollar SALT deduction cap?
Yes, but for itemization to pencil out, you need to beat not only the SALT deduction cap, but the standard deduction, which was increased in the TCJA to $24,000 for married filing jointly.
The various itemized deductions have to be greater than $24,000, not just greater than $10,000. Lifting the SALT cap would mean more taxpayers itemize than do currently — and itemized deductions have always been a high income activity (note that this was recorded in 2016, before the TCJA).
Conclusion
Instead of increasing the cap on the SALT deduction, the ideal solution is to abolish it — and most other itemized deductions too. The current standard deduction would ideally be increased, but regardless, the implicit spending that occurs with a higher SALT deduction benefits the disproportionately well off, and increases the difficulty of other kinds of anti-poverty measures.
