The President and Congress’ New Tax Plan Calls for the Elimination of State and Local Tax Deduction
The State and Local Tax Deduction, or SALT, recently came under scrutiny amidst the debate over tax reform. Implemented in 1913, SALT allows taxpayers to deduct money paid towards state and local taxes from their taxable federal income. The deduction costs the federal government about $96 billion each year, but state and local governments argue that it is crucial for local development.
Americans Against Double Taxation, a coalition consisting of CSG and 21 other local government organizations, is pushing to preserve the tax deduction and protect the budgets and economies of state and local governments.
First, losing the SALT deduction could mean that state and local governments would feel more pushback when taxes needed to be raised. With the SALT deduction in place, a $100 rise in state or local taxes would be accompanied by a $35 deduction in federal taxes, meaning taxpayers would only feel a $65 increase in taxes. As a result, in addition to an immediate rise in their tax burden, taxpayers would also feel more of any future tax hikes.
Alternatively, repealing this deduction would also prevent homeowners from deducting local property taxes. This could constrict home buying or depress home prices across the country and greatly damage local economies and consumer confidence. Many states and localities pay for police, schools, and other services through property taxes, so this fall in home prices could cause states and localities to lose even more revenue. Losing this revenue could put a lot of pressure on state and local governments.
This Wednesday, the President and the “Big Six” group of legislators released a more detailed outline of what these reforms could look like. As expected, the SALT deduction is on the chopping block, but municipal bonds will thankfully maintain their tax exempt status.
The plan also doubles the standard deduction and increases the child tax credit, which the administration hopes will make up for the loss of the SALT deduction. However, the plan would also repeal personal exemptions for dependents which, when combined with the loss of the SALT deduction, would likely result in larger tax burdens. Additionally, even if this plan does lower taxes, most of the benefit would come once a year during tax season, rather than over the course of the year.
Most of these reforms are aimed at removing exemptions which disproportionately aid the wealthy. While this may be a valid concern and a topic of reform, the current plan fails to address the budgetary strain that state and local governments would feel as a result of these policies.