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Does the State and Local Tax Deduction Support States’ Rights?

On NPR this morning, Rep. Buddy Carter (R-Georgia) expressed his support for repealing the state-and-local tax deduction by asking rhetorically if it’s fair to ask taxpayers in low-tax states, like his and South Dakota, to subsidize taxpayers in higher-tax states, like New York and Minnesota.

I’m open to debate on the merits of letting individuals exempt from their federally taxable income the amounts they pay in state and local taxes. But I can think of two responses to Rep. Carter’s take on the SALT deduction.

First, let’s answer his question with a question: is it really fair for cheapskates who don’t contribute anything to charity to “subsidize” taxpayers who do contribute to charity? Should folks who don’t go to church end up paying higher taxers to cover the deductions pious folks like my wife take?

The question is, of course, inaccurate: my tax rates don’t increase when you claim more deductions. But the question also ignores the reason we structure tax policy the way we do: we want to incentivize certain positive behaviors. Supporting charity can meet useful social goals and take the pressure off Uncle Sam to serve those goals. Likewise state and local taxes: Do your part locally, and there should be less slack for Uncle Sam to take up, right?

That leads to my second response: conservatives interested in states’ rights and local control should be all about the SALT deduction. When citizens decide to pay higher taxes for their local schools, roads, and public services, they are choosing to work harder to solve problems with their own local resources. If we encourage states and communities to solve problems, we won’t need as much federal intervention to solve those problems. More local action, less federal action? That sounds like a conservative ideal to me!

We need to have a serious conversation about the merits of the SALT deduction. But Rep. Carter sounds like a number of Republicans who are less interested in wise use of tax policy to incentivize positive social action and pursue political principles and more interested in taking a poke at blue states and punishing them for exercising local control.

10 Comments

  1. Darin Larson 2017-11-06 15:59

    I have two points to add to the discussion:

    1) Where is the normal Republican concern for double taxation? Now both the state and local governments and the federal government will be taxing the same income to the extent it is not all covered by the $10,000 property tax deduction. We hear all the time in the estate tax debate that the government should not be taxing income twice. In the estate tax debate, much of a typical estate has never been taxed (unrealized capital gains, stepped up basis, etc.). In this Republican proposal, all the income will be double taxed without a SALT deduction.

    2. The net flow of tax money compared to federal spending per state already overwhelmingly favors the low SALT states. High tax states generally pay in to the federal government at a far greater rate than what they received in federal government spending in their state. Thus, the “Takers” like South Dakota are already favored over the “Givers” like California, New York, Illinois and Minnesota. Now they will make this disparity worse.

    See https://www.theatlantic.com/business/archive/2014/05/which-states-are-givers-and-which-are-takers/361668/

  2. o 2017-11-06 16:24

    “Charity” is a fuzzy term. Just because a 501(c)(3) has done the paperwork to enjoy tax-exempt status, doesn’t mean that we would all agree that they are “charity.” A whole lot of self (selfish) – interest goes into the creation of much of what is lumped into the “charity” category.

  3. Donald Pay 2017-11-06 16:30

    Darin has stated exactly what I wanted to say on the subject much better than I would have.

    I use that deduction every year. If you don’t you are taxed on taxes, which is the definition of bad tax policy. But, Republicans don’t care about you or me, as long as the fat cats get served.

    Low-tax states are “takers.” Start paying your own way.

  4. Rorschach 2017-11-06 16:53

    The real problem here is that GOP Partyists are crafting this whole thing behind closed doors and trying to come up with something they can pass without any Democratic votes rather than working across party lines to come up with a more modest tax reform proposal with broader support. Their wish list obviously includes windfalls for the rich and punishing Democratic states/rewarding GOP Party states, but that’s neither good for the country nor wanted by a majority of the public. I think their plan – whatever it turns out to be – is going to have trouble passing.

    I’d like to see the Democrats issue their own plan rather than sitting around and playing defense and doing nothing. If the Democrats can’t come up with a plan that is better than what the GOP Party offers, then what good are they? If Democrats want to win in 2018 they need to show the public they can govern better than the bumbling idiots running congress now.

  5. Darin Larson 2017-11-06 17:29

    I agree, Ror. The Democrats should offer an alternative plan that is truly focused on the middle class. The Democrats could offer a plan that decreased middle class taxes to a much greater extent than this sham Republican plan for the rich and do it without mortgaging our children and grandchildren’s future. Then, compare plans side by side and let the people decide if the 1% need more tax cuts.

    With the elimination of the estate tax, the elimination of the Alternative Minimum Tax, the reduction in corporate taxes from 35-20%, the elimination of the medical deduction, the elimination of the personal deduction as well as the current favorable treatment for capital gains, it would be hard to craft a tax plan in the current political climate that is more favorable to the rich than this Republican plan.

  6. Curt 2017-11-06 17:56

    Yes, the Dems should release their plan and do the side-by-side comparison for taxpayers. In fact the broad outlines have been drafted months ago by Bernie and other Sen Dems.
    The SALT question may be more an issue of pre-emption. Income already taxed by one level of govt should not be subject to further taxation by another.

  7. jerry 2017-11-06 21:19

    Okay, so where is that minimum amount of one trillion dollars for infrastructure? Work work work with great paying jobs for everyone. What happened to that promise from trump? Someone has to pay taxes to be able to pay for those projects.

  8. Richard Schriever 2017-11-07 06:54

    jerry – Trump’s infrastructure plan never included ANY Federal spending. It was/is structured like a Giant Federal TIF, where-in PRIVATE infrastructure developments (think Toll Roads, Wind Farms, Pipelines, Coal Mines, Railroads) were given TAX BREAKS. There was/is ZERO spending included.

  9. jerry 2017-11-07 08:36

    trump says that he is gonna put in 200 billion for starters according to him. “The President has dedicated $200 billion in his budget for infrastructure that can be leveraged for a $1 trillion investment into our crumbling systems. Investing in rural infrastructure is a key part of the President’s plan.” https://www.whitehouse.gov/blog/2017/06/08/president-trumps-plan-rebuild-americas-infrastructure
    So when is that gonna happen? Putin said that he wanted good roods and bridges so he can drive his low rider on them. jobs jobs jobs dont’cha know.

  10. Wayne B. 2017-11-07 08:38

    I’ve got conflicting values on this. I really dislike double taxation, so SALT is a valuable mechanism for removing that double taxation.

    However, I also like the idea of removing social politics from our tax code. Giving specific tax breaks for behaviors – however beneficial they are for society – is an inefficient way to induce behaviors. As much as I enjoy and utilize the mortgage and charitable deductions, I recognize that they’re poor drivers, and rather rewards after the fact. I own a home so I can put a hole in a wall where & when I want. I give to charities because I believe in their missions. Paying 1/3 less to Uncle Sam for those expenses is gravy.

    I would argue it would be better, to avoid double taxation, to prohibit states from levying taxes on gross personal income. Instead, taxes could only be levied on net income after federal taxes have been deducted. Worrying about property taxes is less valid – there are so many renters in America who never get to deduct property taxes, and we have considerable agency over the types of properties we own to mitigate our property tax liability (if you’re buying a house based upon the deduction, your priorities are messed up).

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