Cutting SALT From the Federal Tax Diet

The state and local tax deduction needs to go.

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IRS image
Larryhw/Dreamstime

In the quest for a better tax code, it shouldn't be difficult to agree that a tax deduction that mostly benefits rich people and subsidizes high-tax state and local governments must go. That's what the state and local tax, or SALT, deduction does, and it was rightly slated for termination in the tax reform framework by the "Big Six," to the displeasure of some in Congress. Resistance from these lawmakers, however, is misplaced, because a repeal of SALT—alongside other reforms in the plan—would most likely leave the vast majority of taxpayers better off and our tax code much fairer and simpler.

The ability to deduct state and local taxes from one's federal tax bill goes as far back as the income tax itself. According to the most recent Trump administration budget, it is the sixth-largest individual income tax expenditure and represents a loss of revenue of $100 billion annually.

That's a lot of money, considering it benefits the less than 30 percent of taxpayers who choose to itemize deductions, and even then, it's only those who aren't limited by the alternative minimum tax. Some argue that SALT is an expression of our federalist tradition to give priority to localized spending or is a way to avoid the double taxation of state and local taxpayers' income, but these arguments are overwhelmed by the fact that the targeted benefits mostly favor higher-income earners in high-tax states and are highly distortive.

Data show that the lion's share of the SALT flows to high-income taxpayers, who are most likely to itemize. According to the Tax Policy Center, "about 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81 percent of tax filers with incomes exceeding $100,000."

SALT also benefits states that combine high incomes and high-tax environments. According to a Tax Foundation study, the majority of the benefits are concentrated in California, New York, New Jersey, Illinois, Texas and Pennsylvania. California alone claims 19.6 percent of the total cost of the tax expenditure. That's what I call concentrated benefits and diffuse costs.

Indeed, the deduction provides an indirect federal subsidy to state and local governments in high-income areas by decreasing the net cost of nonfederal taxes to those who pay them. As the Tax Policy Center notes, in some instances these state and local governments effectively "export a portion of their tax burden to the rest of the nation."

Estimates show that by sheltering state and local taxpayers from the spending decisions of their lawmakers, the deduction encourages anywhere between 2 and 20.5 percent more spending. Not surprisingly, the deduction distorts the financing decisions made by state and local lawmakers. In 2016, for instance, Alaska Gov. Bill Walker cited SALT as instrumental in proposing a hike in income taxes over a hike in the sales tax. He said, "We selected an income tax over a sales tax for a couple of reasons. … State income taxes are deductible from your federal taxes."

Translation: "Thanks to SALT, we can increase your taxes without upsetting you as much as we should." You don't have to be a genius to understand that when taxpayers are less vigilant about policy changes and lawmakers' spending behaviors, we don't get the best policies implemented.

High-tax and big-spender states have already expressed their discontent. California and New York lawmakers in particular aren't eager to make the cost of their policies more visible. That said, taxpayers in these states shouldn't worry about the repeal of SALT. According to one estimate, the repeal, when combined with other features of the tax reform framework—such as lower individual income tax rates and the doubling of the standard deduction—would most likely result in a lower tax burden for all Americans who make less than $1 million, which is 99.7 percent of tax filers. The only potential losers are those who make more than $1 million a year. The degree to which they would pay more taxes depends on the impact that repealing the alternative minimum tax would have on these filers.

Finally, though I don't like the idea of paying for tax reform with more revenue, I'm fully behind getting rid of bad tax deductions to make the tax code fairer, simpler and less favorable to special interests and big-government policies. This is one of those instances. That it would raise money to pay for good tax reform is an added bonus.

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87 responses to “Cutting SALT From the Federal Tax Diet

  1. Is it too much to ask that a writer performs a Google search on the deductibility of sales tax before hitting the submit button? You can in fact claim sales tax as an itemized deduction if it is more favorable to do so. Along with property taxes.

    The biggest issue for tax simplicity isn’t deductions, a high school drop out at H&R block can key in numbers and let the computer determine what to do. The issue is the complexity in determining exactly what is income. It’s an incredibly difficult thing to do, especially for businesses, who’s records range from a clean organized QuickBooks, to a shitty credit card statement that may or may not be related to the business.

    If you want tax simplicity create a national sales (not VAT) tax and eliminate the income tax. A national sales tax is the closest thing to a voluntary tax we could ever have.

    1. States without income taxes complained and got sales tax added as an alternate deduction instead of eliminating the income tax deduction.
      I support eliminating deductions for SALT (income, real property and personal property), mortgage interest and charitable contributions in exchange for a lower rate.

      1. The real silver lining here is that it will hurt states like NY and CA the most. And those progressive piece of shit deserve to feel as much pain as possible, considering all the evil they’ve inflicted on the rest of us.

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    2. Hear hear.

    3. True dat. When was the last time anyone here tried translating an income tax form from one language to another? Yet this is required by all manner of government bureaucracies. IRS forms seem formatted specifically to make computers crash if you try to reproduce them understandably.

  2. So she’s saying we need a policy expanding payments, promoting enhanced revenue?

    1. The question is, was my comment too clever, or not clever enough? Knowing you folks as I do, I’ma go with the former.

  3. Is Reason socialist now? Tax the rich, eh? We’re high earners in these states because the cost of living is astronomical, including our positive feedback loop property taxes based on cost of living adjustments.

    How about adjusting federal income tax brackets by cost of living? If I had my income down south I’d be rich. Up here I’m just getting by.

    1. I think you may have this reversed. The de facto subsidies create a perverse incentive to keep your cost of living higher than it normally would be.

    2. Yeah, anyone seeing my apartment would laugh at the notion that I’m “rich” (for an American).

      That said, I support anything that might stop my state from raping me so hard.

    3. Coastal elitists and Blue-State’s aren’t paying their fair share of federal tax.

      1. You wanna pay my $15,000/year property tax bill? This proposal would be double taxation. “Coastal elitists”? This would hurt regular people with jobs, kids and mortgages most. It’s a safe fuck you from the Republican Party because it doesn’t impact their base at all.

        1. The idea is to get taxpayers in states like ours riled up enough to demand spending cuts. Have you looked at all the crap we’re spending money on?!

        2. Double taxation exactly. The property taxes in Texas are outrageous and the tax districts are corrupt fiefdoms. I pay $14,000/year in property tax and they try to raise it every year by screwing with the rates and/or the property values. It’s all paid with after tax money; eliminating the deduction would fuck every property owner in the state.

          1. Dang, you might as well rent.

        3. This is only double taxation if the Federal govt also taxes your property. It doesn’t (and like income tax, wouldn’t be illegal if they did). It’s a state/local issue, and that’s where it should be addressed.

    4. No. the point is that these deductions shift the burden away from progressive run states with high sales tax rates. Progressives should suffer the results of their vile policies. Not the rest of us.

  4. Eliminate all deductions.

    It is ridiculous to talk about the ‘fairness’ of anything in the federal tax code until everyone is actually paying taxes.

    One reason that the dems love progressive tax codes is that it is always possible to whine that any given tax reduction ‘favors the rich’ (at whatever amount you define as rich) when only the rich are paying taxes.

    1. If you want fair, make everyone pay the same amount. 4 trillion USD in spending divided by 200 million adults equals 20,000 USD per year. Write the check, no forms to fill out.

      1. Your calculation ignores that there are revenue sources other than individuals. Less than half comes from individual income taxes.

      2. And if you can’t write the check, show up with your work gloves and aprons.

  5. a tax deduction that mostly benefits rich people

    When the “wealthy” (which the article seems to think is anyone making >$100K) pay nearly all taxes, every single tax break mostly benefits rich people.

    But, this would be moot if the federal government had to collect its revenue from the states (as soveriegns) and was not allowed to collect directly from the citizens.

    1. The War of Northern Aggression pretty much settled the idea of sovereign states. I propose we stop pretending otherwise and rename the country, “The SEnatorial Republic of Federal Sectors”: The SERFS.

      1. When you post racist crap like “the War of Northern Aggression” why would anyone listen to one thing your racist fingers typed?

    2. When the “wealthy” (which the article seems to think is anyone making >$100K)

      Seems pretty reasonable when an annual income of around $35,000 puts you in the top 1% globally.

      1. Most of the globe is a shithole.

  6. [SALT]..represents a loss of revenue of $100 billion annually.

    I understand the point de Rugy is trying to make but the government getting less of what its citizens earn isn’t a loss of anything. There is no such thing as a quest for a better tax code that starts by conceding a reduction in aggregate tax collection represents a “loss” for the government. The fact that deducting state and local taxes allows those states to covertly increase their taxes is a separate issue. The “quest” for a simpler tax code has hundreds of beaches to land on before this one.

    1. the government getting less of what its citizens earn isn’t a loss of anything

      Yeah – I was a little shocked to see this kind of talk at a libertarian outfit.

      1. The point is that this deduction disproportionately benefits progressive run states with high sales tax rates. Which is part of how they redistribute money from red states.

        1. Don’t kid yourself. Red states receive far more tax money than they contribute. Welfare queens all.

          1. Explains why DC has the highest food stamp utilization in the country.

            Go cry more that the rednecks in flyover country aren’t subsidizing your property taxes anymore.

          2. “Red states receive far more tax money than they contribute.”

            And why is that? Could it largely be from Medicaid funding? I reckon the same people who parrot this tired line are mostly the same who cried when some states refused to jump on the Medicaid expansion bandwagon. Democrats would now like to expand Medicare. What do you think that would do to the balance of payments derived from federal revenue?

          3. Schu, that is utter bullshit. A Media Matters talking point long since disproven. Go peddle that shit on WaPo, or some other liberal rag where they buy that pablum.

      2. Veronique is not necessarily a libertarian outfit…

  7. You can have my Strategic Arms Limitation Talks deduction when you pry it out of my cold war hands.

  8. I agree that the tax deduction distorts policy. However the argument that “the rich will suffer” confuses the issue.

    I will also point out that Texas manages to have 1/2 the tax burden of California so I think there are larger forces at issue.

    1. However the argument that “the rich will suffer” confuses the issue.

      And it’s a straw man anyway. Middle-class property owners are the ones who will suffer. Resoundingly not “The Rich.”

      1. Exactly. The “rich” already lose most of this deduction due to the AMT.

        1. ^ This. And she points this out, even.

          1. And she’s wrong. The AMT effectively phases out by about $700k, i.e. you pay more even with the deductions added back in because of the much higher marginal rate (39.6 vs. 28).

            And please explain why middle class property owners need to be given an extra benefit? Even if they did it would be the state and local governments inflicting the pain since the mortgage interest deduction is retained.

  9. According to the most recent Trump administration budget, it is the sixth-largest individual income tax expenditure and represents a loss of revenue of $100 billion annually.

    I would expect Reason not to use that phrase “tax expenditure”, which suggests that taxes forgone are actually payments made by the Federal government.

    1. I realize that Washington wonks tend to talk that way to justify the way they intend to put the screws to private citizens, but that doez come eith abhorrent implication that that oart if one’s income belongs to the Feds and they are giving it back.

  10. If we lived in a true “taxation federalism” regime, where federal taxes paid for federal public goods, state taxes for state public goods, etc., then this argument makes sense. But since we don’t, it doesn’t.

    And wasn’t there a time when it was libertarian-chic to advocate replacing the regular federal income tax with AMT-For-All? Is that no longer cool?

    1. And, as an employee of a local public agency well versed in the federal, state and local funding issues, I can say with authority that, this needs to change. In a local agency, we spend an inordinate amount of time seeking funding from these sources with no real purpose in mind. It’s just all about bringing home the bacon. Because it makes us look good. Fuck efficiency or any other real, economic parameter.

      Frankly, as a local public transit operation, if we had to survive on what we could garner in local, public funds, we’d be operating at a tenth of our current status and providing only public transit for what are known in the trade as “transit dependents”. i.e. we’d be just another social welfare organization.

      But then again, this is CA and we live for social welfare programs. After all, that’s what we live for.

  11. I feel a bit differently. If my money is going to be stolen by government, I’d rather it were stolen closer to home where there might be more resistance and/or guidance, however little that is. If there were, say, a constitutional limit on how much taxes can be stolen, I would rather the feds got the dribs and drabs left over after the state took its share; and that the state had to settle for what was left after the locals got first dibs.

    To some extent, that’s what the deduction does. It’s not very effective, but it’s something. I would rather strengthen it than remove it.

    1. I feel a bit differently. If my money is going to be stolen by government, I’d rather it were stolen closer to home where there might be more resistance and/or guidance, however little that is.

      ^ This x1000

      Ms. de Rugy seems to believe that my money belongs first to the Federal Government, then if they can’t find any use for it, my state government can have some, if they can’t find any use for it, then my county and any other local agencies have a go, at which point they may deign to “lose” some back to me.

      1. So both of you failed to read the part about how this effectively subsidizes more local spending. I prefer my taxes to be as economically efficient as possible and uniformly applied. The fewer exemptions, deductions, and credits the better.

        1. If you really prefer economically efficient spending, you’d leave it to the private sector. Public spending, where there is an absolute lack of competition, has no incentive to do so.

          Ask me how I know.

  12. I keep knocking my head against the same wall of ignorance concerning the US INDIVIDUAL INCOME TAX. C’.mon Reason and reasonoids-do a little research into the history and law of the income tax!
    1. Because the income tax is an excise tax, as determined by numerous Supreme Ct decisions up to NFIB v Sebelius, and testified to by numerous government officials,and as the original jurats on the 1040 form stated, it is not a tax on income, per se, but rather a tax on an activity or privilege
    2. The information returns (W-2, 1099) you receive from payors are not merely accounting statements received in the ordinary course of business but sworn affidavits attesting to the fact you earned not just income but taxable income
    3. If you file a 1040 with the IRS forms designed to rebut the information returns and say you earned zero (taxable) income the IRS will refund all your money that was withheld, including payroll taxes
    4. If you do not owe federal income taxes you also do not owe state income taxes because the states do not have their own income tax but they piggy back on the federal tax

    1. So that is the shspe of your tinfoil hat. Good to know.

      1. I have a feeling this thread is done.

    2. Sure, the IRS forgives you your taxes because you say so. And they never jail anyone.

      1. Wesley Snipes would agree with that statement.

    3. 1) Not all states piggyback on the federal code. Some don’t even have an income tax, including TX which is cited in this article as benefiting from SALT.

      2) FICA isn’t refundable in any circumstance. And, it’s an income tax on both you and your employer.

  13. In 2003 a libertarian activist in Michigan named Pete Hendrickson wrote a book about this called “cracking the code” in which he describes the history and intent of the US INDIVIDUAL INCOME TAX. That book is in its fifteenth printing. Thousands, probably tens or even hundreds of thousands of Americans receive full refunds of all federal and state income taxes withheld. This is been going on for fifteen years now.
    Congress is not going to meaningfully reform the income tax,and even if they do, they next Congress can raise it again. Unless you make an effort and individually claim your rights (ie privatize your own paycheck) , as the Constitution, tax laws and adminsistrative procedures allows you too, you will never, ever reform or abolish the income tax
    The income tax is not a tax on everything that comes in. It is a tax on the exploitation of a federal privilege for profit. It is based on the Constitution and the law of sovereignty as Chief Judge Marshall explained in McCullough v Maryland
    http://www.losthorizons.com http://www.nontaxpayersforronpaul.blogspot.com

    1. Plenty of other tax activists have tried this. They all end up on the federal dole, in federal prison.
      Not saying you’re wrong, just saying it doesn’t work in the real world.

  14. In 2003 a libertarian activist in Michigan named Pete Hendrickson wrote a book about this called “cracking the code” in which he describes the history and intent of the US INDIVIDUAL INCOME TAX. That book is in its fifteenth printing. Thousands, probably tens or even hundreds of thousands of Americans receive full refunds of all federal and state income taxes withheld. This is been going on for fifteen years now.
    Congress is not going to meaningfully reform the income tax,and even if they do, they next Congress can raise it again. Unless you make an effort and individually claim your rights (ie privatize your own paycheck) , as the Constitution, tax laws and adminsistrative procedures allows you too, you will never, ever reform or abolish the income tax
    The income tax is not a tax on everything that comes in. It is a tax on the exploitation of a federal privilege for profit. It is based on the Constitution and the law of sovereignty as Chief Judge Marshall explained in McCullough v Maryland
    http://www.losthorizons.com http://www.nontaxpayersforronpaul.blogspot.com

  15. Fuck you. Cut spending.

    1. Indeed.

  16. In the quest for a better tax code, it shouldn’t be difficult to agree that a tax deduction that mostly benefits rich people and subsidizes high-tax state and local governments must go.

    I’m rich people, by this definition. Why should the federal government get even more of my cash?

    Deductions and exemptions prevent the government from stealing more. How could any libertarian want to repeal any of them?

    As Lew Rockwell says, they aren’t “loopholes”, they’re “remaining freedoms”.

    1. EXACTLY!
      This is the kind of hair splitting and double speak that is why Reason is losing street cred.
      Reason has simply become a right of the isle these days, and has lost its libertarian bona fides.

      So you (Reason) advocate for a more “fair” theft, eliminate a means by witch some are relieved of being robbed, and argue that a net increase to the Fed, the very epitome of centralized power libertarianism opposes, is a good thing?!?

    2. Deductions and exemptions prevent the government from stealing more. How could any libertarian want to repeal any of them?

      Because it is effectively a market distortion, which makes markets less efficient and compounds the problems of taxation (very much the same reasons Hayek and Friedman supported the land value tax).

      A large portion as to why the federal tax code is 73,954 pages is to accommodate all those deductions and exemptions, and makes possible to pass political favor surreptitiously. If that’s your idea of “remaining freedoms”, have at it.

      While state deductions probably isn’t the best start, it is a start, and for that, it will do.

      1. While state deductions probably isn’t the best start, it is a start, and for that, it will do.

        Yeah, sure, why not? Let’s start with the “loopholes” that people on the bottom use and see if that solves the problem before doing something that might impact people who really matter.

        1. Mmmm more of that sweet, sweet populist socialism. Take the other guy’s money cuz he has more than me is the taxation equivalent of she was asking for it wearing that dress.

          Lower rates and fewer deductions are better for exactly the reasons he laid out. Taxes exist to fund the government and not for social engineering.

          1. And yet, our governments at all levels use them for exactly that; social engineering.

            After all, they know better than any of us what we really need versus what we might want.

        2. Damn shame you don’t make enough to live out your own Peter Schiff fantasies. Perhaps if you applied yourself more, you could have a congressman of your very own.

          that people on the bottom use

          I’m sorry. Is that libertarian hip speak for “I’m alright Jack”?

          The people at the bottom generally don’t itemize deductions, and claiming yourself as the poor and oppressed puts you in league with college liberals, in which case everything you say can be summarily ignored.

  17. I would not have even known that I could take this deduction were it not for the software I’m using suggesting it. It never crossed my mind that my state and local taxes alone are higher than the standard deduction. I never itemized before because I never had a reason to.

  18. According to the Tax Policy Center, “about 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014

    If you made $50k in 2014 your standard deduction would have been at least twice what you could have deducted for SALT (for CA residents, where we have some of the highest taxes in then nation). The only reason people making under $50k would ever claim a deduction for SALT would be if they had a reason to claim other deductions that would make up that difference.

    I don’t generally expect this kind of think from de Rugy. I think she’s spending too much time at NPR.

  19. Does de Rugy, or anyone else, seriously think that lawmakers in states such as California and New York consider the federal deductibility of state taxes for high earners when deciding how much to spend? “At first I wasn’t going to vote for the bullet train, but then I remembered that our high income individuals will be able to deduct the additional taxes so….”

    1. Of course they do. Why do you think it is exactly these states that are fighting this idea? Without the deductible those people might suddenly start asking questions about where all those dollars are going.

      1. ^^^^

        You’re on to something there. Just look at some of the campaigning for funds for policial favored projects in states like my home state of CA.

  20. Where the fuck did someone get the idea that just because you itemize you’re rich. It’s right here- 10% are definitely not rich:

    “about 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81 percent of tax filers with incomes exceeding $100,000.”

    So fuck the 10%? That’s not an insignificant number of people. And notice how they left out the entire range of 50-100k, which I would imagine is where most married joint filing taxpayers end up, at least in high cost areas.

    You can get rid of that deduction when you get rid of every deduction.

    1. “So fuck the 10%? ”

      Yep. That’s the SOP call to arms for progressives. We want it all and we want “the rich” to pay for it. After all, they once said, “Let them eat cake”.

      La boh?me and all that.

      ?Viva la Revoluci?n!

  21. Yuge libertarian tax policy may be implemented, brought to you by the Trump administration – Trump mentioned once.

    Any article discussing what Reason disagrees with from Trump – insane ranting against Trump a thousand times.

  22. For the author: “make the cost of their policies more visible”
    Connecticut has a law that FORBIDS gas stations from showing the details of the price per gallon – producer, federal parasite, state parasite.

  23. RE: Cutting SALT From the Federal Tax Diet

    Let’s face it.
    We can’t give enough to the government regardless if it is the federal, state or local levels.
    If we don’t give more money to our oppressors, they will never be able to buy that third BMW they want.
    Do you really want that on your conscience?

    1. Are you talking about our local safety workers in CA that retire at age 50 on up to 90% of their average, highest, three year salaries?

      Please, let them have their BMWs. After all, they risked their lives for all those years of grinding employment down at City Hall.

  24. Envy is not a policy. I think it’s generally good policy for libertarians to oppose any tax increase, including the removal of deductions like this one, unless the deduction is so narrowly tailored as to obviously be a special favor to a particular individual, entity or industry. “The rich” does not qualify as a special interest group, though being part of a special interest group may help you to be rich.

  25. I think both SALT and mortgage interest deduction need to go; but it might be prudent to phase in these changes gradually over a few years somehow.

    1. ^^^^^^

      Exactly!

      Phase change in. Whether it’s eliminating these deductions or killing Social Security.

      A bad but consistent policy is better than a good, but vacillating one.

    2. Um… after the looter politicians balance the federal budget?

  26. The reason that I support maintaining the fact that taxes are deductible is that it prevents the worst possible situation. A tax rate of over 100%. At one point, this was actually possible in some states due to the interaction of estate taxes, local, and federal income taxes (though it required some significant mismanagement, it was possible).

    The various tax codes interact in nearly countless ways, and having this deduction prevents some of the worst possible interactions that can and will exist.

    1. You just have to beat the anger into the peasantry before you can get a revolution.

  27. I guess those deductions partially counteract the hugely disproportionate federal spending that most of the low tax states get. Well, not really, since we’re spendig money we don’t have regardless, but I wonder why politicians in states like NY don’t put up a fuss about spending in the other states instead of just intently focusing on bringing home the bacon as usual.

    Amazing how most “solutions” tend to compound the problem, anyway.

  28. Um… nobody _chooses_ to itemize deductions. We unrich conscripts into the government’s taxes are forced at gunpoint to fill out the forms in accordance with shifting fine print. I have deducted state & local extortion, and my party supports abolishing the 16th Amendment. My vote says to repeal the communist manifesto plank 2 income tax, no ifs, ands or statistics.

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