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Rich States Growl At Trump Tax Plan

The Trump Administration’s stated intention to eliminate the state and local tax deduction (SALT) is likely to meet major opposition from big blue states’ Congressional delegations. The New York Times reports:

To some, it is a tax on blue-state liberalism. To others, President Trump’s plan to end the federal deduction for state and local taxes would eliminate a costly perk for the wealthy.

But to many taxpayers, the deduction is a cherished break that can save them thousands of dollars in double taxation.

Mr. Trump and House Republicans, riding a wave of conservative and populist sentiment, are pushing to end the provision. Yet they must overcome a long tradition and powerful opponents, including Republican and Democratic officials in wealthy, populous states like California, New Jersey, New York and Texas.

The deduction overwhelmingly benefits six-figure earners. The benefit is largest for affluent people living in states that impose high income tax rates, which are much bluer than average.

Trump’s abbreviated tax proposal is too vague to assess in any level of detail; it appears on the whole to be too expensive and too regressive. But Congressional leaders and Administration officials looking to turn it into something more palatable should hold the line on eliminating SALT. This would raise much-needed revenue to pay for the plan’s other provisions, and it would be targeted, for the most part, at the coastal metropolitan regions that have benefited most from the economic changes of the past few decades.

Moreover, as we have noted before, scrapping SALT could have unexpected positive effects at the state level. As it stands, many wealthy people in cities like San Francisco and New York have largely withdrawn from the state political process. They can afford to acquiesce to inefficient government and the high taxes required to pay for it in part because they can deduct all of that money from their federal tax bill. If it weren’t for SALT, we might see more talented and creative people in wealthy blue states re-engage in state government in a meaningful way.

Some SALT opponents will claim that the measure would create a system of “double-taxation,” and they aren’t entirely wrong. But if this were really the concern, states could address it by making federal tax deductible from state tax bills. Of course, that would impose new costs on states, just as SALT imposes costs on the federal government. This is at its core a fight over resources, and it’s one that the working class deserves to win more than coastal high-flyers.

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  • D4x

    Trying, again, to eliminate SALT in Federal tax-reform SHOULD be a fine way to get Dems2017 to finally find something real to ‘resist’, perhaps to even engage in a genuine ‘conversation’ with POTUS, or at minimum, learn how to negotiate instead of whining about everything.

    Must be a really slow news day today.

  • WigWag

    Trump’s tax plan also calls for eliminating the alternative minimum tax. The AMT renders the deduction for state and local taxes mostly moot for high income earners in blue states. Eliminating the salt deduction and the AMT at the same time would mostly be a wash for those who make six figures or more.

    Taxpayers in blue states who don’t have enough income to trigger the AMT would actually be hurt more by eliminating the salt deduction that higher earners would be.

    • Fat_Man

      I have been in AMT for the last 15 years and have not benefited from my SALT deduction. I might be ahead from the Trump plan, but it does not have nearly enough details to know. E.g. If they lower the corporate rate to 15% will they raise the rate on corporate dividends?

      • So it is simplification with nearly balanced consequences; that is the Holy Grail, I thought.

        • Fat_Man

          We don’t know. We haven’t seem enough details.

    • douginsd

      Sure, but it’s not a wash for accountants, who suddenly can bill a lot fewer hours.

      As for you personally, it’s $300 more tax, but one less return. Perhaps, with TurboTax, the time the second return takes is worth less to you than the $300.

  • Andrew Allison

    It needs to be clearly stated that the SALT deduction represents a nationwide subsidy to residents of high tax States. The one major omission to the President’s proposal is reducing the limit on the mortgage interest deduction. It is asinine that the Federal government is subsidizing $1M mortgages when the media home price is under $200K. The argument for the mortgage interest deduction is that it makes home ownership affordable to the many, not the few.

    • ThomasD

      If the goal is to encourage a middle class/ownership class then the mortgage interest deduction is ok, but probably should have a phased reduction schedule tied to median home prices.

      • Andrew Allison

        As currently enacted, the deduction is for the interest paid on a mortgage of up to $1M, which makes sense if you consider that although the principal is fixed the interest may fluctuate (ARM). Reducing the deduction limit to, say 2x the median home price (<$400K) makes all the sense in the world.

        • douginsd

          The problem is that in high-cost areas of high-tax states, $400K may not even buy a one bedroom condo. For instance, a condo my wife and I sold in Fremont, CA 94538 a while back now goes for: “1 bed 1 bath 1,030 sf – Zestimate®: $483,023”. BTW, it is a 44 year old complex, and back then the HOA was $336 a month.

          Plus, all those high income, high-tax states are net contributors to the Federal Treasury, which is why they feel entitled to push for more programs to try to get some of that money sent back their way. Unless you set the limit b the median per SMSA, you will have a big fight on your hands. In the SF Bay area, try buying a detached home on a tiny lot in a halfway decent school district if your combined income is less than $100K. Unless you just cashed in a bunch of stock options, you can’t.

          • Andrew Allison

            That’s not a bug, it’s a feature. If the residents of high tax states were actually paying all the taxes (as opposed to getting a tax deduction for them), they might do something about it. Furthermore if, as we are assured by the Realtors, eliminating the SALT deduction would cause house prices to fall dramatically, imagine how much they would fall if the Federal government weren’t subsidizing mortgage interest [grin]. Which is not to say that housing prices are not completely out of control in the Bay Area, But why should the Federal government subsidize housing for Google, et al.’s overpaid employees who, thanks in large measure to the associated tax breaks have bid prices into the stratosphere. FWIW, I just saw a headline that Schumer claims that eliminating SALT would cost New Yorkers an average of $5K/year. In other words, we the people are paying New Yorkers $5K/yr. WHY?

    • Jacksonian_Libertarian

      I agree, the taxpayers in high tax states are being subsidized by taxpayers in low tax states. Stinking parasites and their unjust complaints.

  • Angel Martin

    A tax plan on blue state liberalism would include huge excise taxes on: electric cars, international airline tickets, $500 coffee grinders, hundred dollar bottles of imported wine, $3000 bicycles,

    And eliminating special carveouts for: stock options on companies with no profits, “carried interest”, deductibility and credits for $50K pa college tuition and 30K private schools, yachts with solar panels etc.

    • ——————————

      You need to bump up the price of the wine and bicycles….

    • Fat_Man

      If they really want to persecute the Blue State liberals, they will crack down on nannies and gardeners.

      • That’s border enforcement.

        • Fat_Man

          also tax

    • Somewhere between punitive taxes and gratuitous subsidy there must be a compromise. Like maybe, neither.

  • Proud Skeptic

    This will never make it. The best they will ever be able to get is to limit it.

  • Fat_Man

    This is one move that the Dems will not be able to claim is a tax cut for the rich. How are they going to be able to argue for it with a straight face?

    • Angel Martin

      The same way as they argued stopping wind power off Martha’s Vineyard was “for the earth”.

    • ThomasD

      Agreed, eliminating or reducing SALT deductions is entirely consistent with their rhetoric that those who benefit the most have an obligation to pay more.

      If people do not like paying high SALT they still have the option of relocating to lower tax areas. Whereas Federal taxation is inescapable.

    • (((kingschitz)))

      The Blue State left usually argues that its federal taxes subsidize Red States, thus, at least implicitly, placing the latter under some sort of vassalage to support their betters.

      Conveniently ignored is how, through SALT deductions, it’s actually Red States subsidizing Blue State welfare systems.

      • Fat_Man

        It is more complicated than that. They are counting SS payments to their retirees who move to FL/AZ as being paid to blue states.

        • (((kingschitz)))

          I chuckle because the Mrs and I, current Bay State residents, are now moving to Arizona! (Far lower property taxes + free weather.)

          • Fat_Man

            Case in point.

  • david russell

    Eliminating SALT deductions hurts Trump personally, as a NYC resident.

    • I bet his accountants have rendered it moot by some other means.

      • Lyle Smith

        How?

      • david russell

        I’ll take that bet. How much will you bet? $1?…10 cents? … a penny?

    • MumuBobby

      I’m sure the media will be all over that angle in five, four, three, two……..NEVER! They’d rather cut off a limb than give the guy a break.

  • Robert Burke

    The answer is to defund Prog Ed in K-12, university and grad schools; replacing the anti-republic and anti-brain pedagogy with Western Enlightenment! This is the fix that fixes all things!

  • Municipal bonds have also benefited from asymmetric tax treatment although this is by judicial decision, as I understand it. Puerto Rican bonds, infamously, were absurdly over-subscribed because of this, raising ‘predatory lending’ to an apocalyptic level on public debt which seems destined to be transferred to the federal tax payer. That might mean, to you.

  • ThomasD

    SaLT deductions mean residents of blue states are not paying their ‘fair share.’

  • Deserttrek

    the only fair way to tax is a no deductions , no exemptions flat tax. 10% , 15%, 20% end of subject.
    any variation is just political manipulation designed to screw one group and help another

    • MumuBobby

      We’ve been assured by our politicians that this bug is really a feature. And by ‘feature’ they don’t mean ensuring that billions would be spent on lobbying those same politicians.

  • Isaiah601

    AMT makes SALT deductions fairly useless. It is going to hurt those who don’t have AMT. But let me ask you this, shouldn’t citizens of states with high taxes demand higher accountability from their State representatives? Sunshine is the best disinfectant. Democracy dies in the darkness, tall….

  • douginsd

    “Yet they must overcome a long tradition and powerful opponents, including Republican and Democratic officials in wealthy, populous states like California, New Jersey, New York and Texas.” Actually I doubt this. Texas has no income tax, and most Republican Representatives are not in the wealthy parts of those states. They are almost all in the Central Valley of California, Upstate New York, etc. To say the least, there is bad blood between Upstate NY and Albany, the Central Valley and both Sacramento as well as LA and the SF Bay area, etc., so the constituents of these representatives might even be eager for payback.

  • MumuBobby

    It’s basically ‘you can have a house or a six figure job, but not both, unless you have a spouse that doesn’t work’ for the wealthy West and Northeastern coasts. Otherwise, you’re going to pay more in tax.

    But if you’re in Florida and making 40,000 a year this puts 500+ bucks in your pocket. And if you’re in Florida and making 100,000 a year it’s probably about 1,500 bucks.

  • alanstorm

    Not sure how the high-income blue state people can complain – aren’t they the ones always supporting paying more taxes? That taxes are patriotic?

    You mean, they’re simply full of used food?

  • FriendlyGoat

    The purpose of a SALT deduction, to include state or local income, sales and property taxes, is to recognize the principle that you should not be paying federal income tax on income you do not have. If you are required to pay these to the state, you do not have them as income.

    • QET

      In fact, FG, it still is “income” to you within the highly expansive meaning of that word that was the very reason for its enactment in the 16th Amendment, but I still agree wholeheartedly with your point.

  • QET

    Though I personally live in a Blue State yet, as per WigWag, lose the benefit of the SALT deduction via the AMT, my belief is that the same income should not be taxed twice by two (or more) different governments. I would rather see the AMT eliminated but not the SALT deduction. I also live in a community with very high RE taxes and I want to continue to be able to deduct those.

    Despite my aversion to all things Blue, I will not abandon my certitude that there is no such thing as a “tax expenditure” nor is a reduction in anyone’s taxes a subsidization of someone else. That is an algebraic fiction that obscures rather than clarifies thinking on taxation.

    If we really want to address Blue State folly, perhaps tying federal taxation to the Gini coefficients of the states would be the way to go.

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