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 As it stands, many wealthy people in cities like San Francisco and New York have largely withdrawn from the state political process.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.