A small but vocal caucus within the House continues to try to push for increases to the cap on the state and local tax (SALT) deduction. But the only changes to the SALT deduction that should be on the table should involve reducing it, not raising it.
The SALT deduction allows taxpayers who itemize their tax deductions (instead of claiming the standard deduction) to deduct the value of certain taxes paid to their state and local governments. The 2017 tax reform law capped the maximum deduction that a taxpayer can receive from state and local taxes paid at $10,000.
After months and months of throwing various proposals at the wall to raise the SALT cap, the latest effort is H.R. 7160, the SALT Marriage Penalty Elimination Act. H.R. 7160 seizes upon the fact that the SALT cap is $10,000 for both single and married taxpayers to claim a “marriage penalty.” It therefore proposes to raise the SALT cap to $20,000 for married taxpayers filing jointly for tax year 2023, up to an income of $500,000.
But if SALT advocates’ concern is truly the “marriage penalty,” then raising the cap for married taxpayers is hardly the only solution. After all, the “marriage penalty” could be addressed just as comprehensively by dropping the cap to $5,000 for single filers.
Since it’s unlikely the members of Congress making a stink about the SALT cap would go for that, it’s clear that the “marriage penalty” is not the issue at all, but rather the cap itself. There’s a few reasons why SALT advocates are willing to put so much effort into reviving the SALT deduction, but none of them should be persuasive to taxpayers.
SALT advocates, particularly those from high-tax states, have repeatedly tried to paint this cap as a middle-class tax hike. That’s not so: an analysis by the Tax Policy Center found that uncapping the deduction would provide no benefit at all to 96 percent of middle-class households. Taxpayers making over $1 million, on the other hand, would receive an average tax cut of $48,000.
That stark divide is no different for this specific proposal. Doubling the cap for married filers would see just 1.3 percent of the benefit go to taxpayers earning less than $100,000. Meanwhile, the tax break would reduce federal revenues by nearly $12 billion in just one year — obviously, the price tag would grow proportionally bigger if extended.
Another argument frequently made by SALT advocates is that it protects taxpayers from double taxation. That’s also an odd argument, since only certain state and local-level taxes are deductible under the SALT deduction. More to the point, most taxpayers don’t benefit from the SALT deduction at all, since it is only available to taxpayers who itemize their deductions — which is only 10 percent of taxpayers, most of whom are wealthy. Is “double taxation” a non-issue for all those other taxpayers?
Another favorite argument is that the SALT deduction helps out “donor states” that contribute more in tax revenue than they get back in federal spending. That’s another way of saying that these states have a lot of “donor taxpayers,” also known as “wealthy people.” Wealthier taxpayers generally pay more in taxes than they get back in benefits under our progressive tax system — a result that’s broadly accepted across the rest of the tax code.
All these arguments are smoke and mirrors. The real reason that the SALT deduction gets so many otherwise progressive liberals to fall in line behind a tax break for wealthy taxpayers is that it dilutes the impact of states’ tax and spend policies on their wealthy residents. Wealthy residents of these states effectively get a discount on their state and local tax bill when they can turn around and deduct it from their federal income tax return.
Without that federal subsidy for states’ high taxes, wealthy taxpayers are feeling the full brunt of their state and local tax bill. That has many of them leaving for greener pastures, and it’s no coincidence that all but one of the 32 members of the SALT caucus in Congress are from the ten states that lose the most tax revenue to interstate migration.
Taxpayers should not be misled by arguments in favor of a tax break for a few wealthy taxpayers in high-tax states. SALT belongs in our cupboards, not our tax code.
Andrew Wilford is the Director of the Interstate Commerce Initiative at the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.