Wednesday, October 17 , 2018, 8:28 am | Fair 52º

 
 
 
 

Veronique de Rugy: Cutting SALT From Federal Tax Diet

In the quest for a better tax code, it shouldn't be difficult to agree that a tax deduction that mostly benefits rich people and subsidizes high-tax state and local governments must go.

That's what the state and local tax, or SALT, deduction does, and it was rightly slated for termination in the tax reform framework by the "Big Six," to the displeasure of some in Congress.

Resistance from these lawmakers, however, is misplaced, because a repeal of SALT — alongside other reforms in the plan — would most likely leave the vast majority of taxpayers better off and our tax code much fairer and simpler.

The ability to deduct state and local taxes from one's federal tax bill goes as far back as the income tax itself. According to the most recent Trump administration budget, it is the sixth-largest individual income tax expenditure and represents a loss of revenue of $100 billion annually.

That's a lot of money, considering it benefits the less than 30 percent of taxpayers who choose to itemize deductions, and even then, it's only those who aren't limited by the alternative minimum tax.

Some argue that SALT is an expression of our federalist tradition to give priority to localized spending or is a way to avoid the double taxation of state and local taxpayers' income, but these arguments are overwhelmed by the fact that the targeted benefits mostly favor higher-income earners in high-tax states and are highly distortive.

Data show that the lion's share of the SALT flows to high-income taxpayers, who are most likely to itemize.

According to the Tax Policy Center, "about 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81 percent of tax filers with incomes exceeding $100,000."

SALT also benefits states that combine high incomes and high-tax environments.

According to a Tax Foundation study, the majority of the benefits are concentrated in California, New York, New Jersey, Illinois, Texas and Pennsylvania.

California alone claims 19.6 percent of the total cost of the tax expenditure. That's what I call concentrated benefits and diffuse costs.

Indeed, the deduction provides an indirect federal subsidy to state and local governments in high-income areas by decreasing the net cost of nonfederal taxes to those who pay them. As the Tax Policy Center notes, in some instances these state and local governments effectively "export a portion of their tax burden to the rest of the nation."

Estimates show that by sheltering state and local taxpayers from the spending decisions of their lawmakers, the deduction encourages anywhere between 2 and 20.5 percent more spending.

Not surprisingly, the deduction distorts the financing decisions made by state and local lawmakers. In 2016, for instance, Alaska Gov. Bill Walker cited SALT as instrumental in proposing a hike in income taxes over a hike in the sales tax.

He said, "We selected an income tax over a sales tax for a couple of reasons. ... State income taxes are deductible from your federal taxes."

Translation: "Thanks to SALT, we can increase your taxes without upsetting you as much as we should."

You don't have to be a genius to understand that when taxpayers are less vigilant about policy changes and lawmakers' spending behaviors, we don't get the best policies implemented.

High-tax and big-spender states have already expressed their discontent. California and New York lawmakers in particular aren't eager to make the cost of their policies more visible.

That said, taxpayers in these states shouldn't worry about the repeal of SALT.

According to one estimate, the repeal, when combined with other features of the tax reform framework — such as lower individual income tax rates and the doubling of the standard deduction — would most likely result in a lower tax burden for all Americans who make less than $1 million, which is 99.7 percent of tax filers.

The only potential losers are those who make more than $1 million a year. The degree to which they would pay more taxes depends on the impact that repealing the alternative minimum tax would have on these filers.

Finally, though I don't like the idea of paying for tax reform with more revenue, I'm fully behind getting rid of bad tax deductions to make the tax code fairer, simpler and less favorable to special interests and big-government policies.

This is one of those instances. That it would raise money to pay for good tax reform is an added bonus.

— Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University, a columnist for Reason magazine and the Washington Examiner, and blogs about ecomomics for National Review. Click here to contact her, and follow her on Twitter: @veroderugy. Click here to read previous columns. The opinions expressed are her own.

Support Noozhawk Today

You are an important ally in our mission to deliver clear, objective, high-quality professional news reporting for Santa Barbara, Goleta and the rest of Santa Barbara County. Join the Hawks Club today to help keep Noozhawk soaring.

We offer four membership levels: $5 a month, $10 a month, $25 a month or $1 a week. Payments can be made using a credit card, Apple Pay or Google Pay, or click here for information on recurring credit-card payments and a mailing address for checks.

Thank you for your vital support.

Become a Noozhawk Supporter

First name
Last name
Email
Select your monthly membership
Or choose an annual membership
×

Payment Information

Membership Subscription

You are enrolling in . Thank you for joining the Hawks Club.

Payment Method

Pay by Credit Card:

Mastercard, Visa, American Express, Discover
One click only, please!

Pay with Apple Pay or Google Pay:

Noozhawk partners with Stripe to provide secure invoicing and payments processing.
You may cancel your membership at any time by sending an email to .(JavaScript must be enabled to view this email address).

  • Ask
  • Vote
  • Investigate
  • Answer

Noozhawk Asks: What’s Your Question?

Welcome to Noozhawk Asks, a new feature in which you ask the questions, you help decide what Noozhawk investigates, and you work with us to find the answers.

Here’s how it works: You share your questions with us in the nearby box. In some cases, we may work with you to find the answers. In others, we may ask you to vote on your top choices to help us narrow the scope. And we’ll be regularly asking you for your feedback on a specific issue or topic.

We also expect to work together with the reader who asked the winning questions to find the answer together. Noozhawk’s objective is to come at questions from a place of curiosity and openness, and we believe a transparent collaboration is the key to achieve it.

The results of our investigation will be published here in this Noozhawk Asks section. Once or twice a month, we plan to do a review of what was asked and answered.

Thanks for asking!

Click Here to Get Started >

Reader Comments

Noozhawk is no longer accepting reader comments on our articles. Click here for the announcement. Readers are instead invited to submit letters to the editor by emailing them to [email protected]. Please provide your full name and community, as well as contact information for verification purposes only.