How badly do Republicans want to cut business and top individual taxes and eliminate estate taxes? Badly enough that they are willing to risk very large budget deficits, to be sure. But also badly enough that they are willing to propose one “offset” to tax cuts that adds up to a $1.3 trillion tax increase for certain taxpayers, largely the kind of upper-middle class folk you would expect to be treated as constituents by the GOP. That’s what is at stake in the Trump/GOP proposal to eliminate the federal income-tax deduction for state and local taxes (SALT).
The deduction, which survived the mid-1980s “tax reform” effort and has not been seriously threatened since then, mostly helps those who itemize their taxes in high-tax, high-income states. It has not for a moment been lost on Republican politicians that these are mostly “blue states.” The top ten in terms of the value of the deduction as a percentage of adjusted gross income, in order, are New York, New Jersey, Connecticut, California, Maryland, Oregon, Rhode Island, Massachusetts, Minnesota, and (tied) Illinois/Wisconsin. All but Wisconsin were carried by Hillary Clinton in 2016.
So GOP tax strategists may simply believe killing the SALT deduction punishes the right states, and also removes an incentive for higher state and local taxes. They also sometimes argue that the deduction subsidizes wealthy taxpayers in high-tax states at the expense of lower-income taxpayers in low-tax states.
Without question, use of SALT skews relatively far up the income scale, although a 2015 Government Finance Officers Association study concluded that “nearly 40% of tax filers making between $50,000 and $75,000 in 2015 claimed the deduction. That is nearly 7.6 million households.” It’s also worth noting that cost-of-living differentials in many high-income, high-tax areas mean the definition of “middle class” includes a lot more people with incomes that would be upscale in Mississippi or even Texas.
Complaints about subsidies for New York and California, moreover, should be balanced against the fact that these states (along with New Jersey, Massachusetts, Connecticut, and Minnesota) are among those most shortchanged in the federal benefits they and their citizens draw as compared to the federal taxes they contribute. And for those affected, eliminating the deduction could represent a big hit on tax day. The average SALT deduction for Manhattan taxpayers in 2014 was nearly $25,000.
Twenty House Republicans, all from blue states, signed onto a letter to Treasury Secretary Mnuchin earlier this year opposing elimination of the SALT deduction. Proponents of the change will argue that the least affluent beneficiaries of the deduction may be sheltered by the GOP plan to increase the standard deduction, which will reduce the number of itemizers. And the more affluent may benefit from rate reduction and/or elimination of the Alternative Minimum Tax.
But all in all, it’s tough to support a tax increase targeted at one’s own state or locality, and going to the mats for killing the SALT deduction will cost the GOP not only some badly needed House Republicans, but also any real shot at bipartisan support for the package. Odds are the tax bill will reduce rather than kill the deduction. And that’s only if the whole unwieldy proposal doesn’t suffer the same fate as the GOP’s health-care legislation so far this year.