President Donald Trump’s proposed tax reform, which would eliminate the state and local tax deduction, would cost California elites about $17.1 billion.
The deduction from federal taxation for state and local tax (SALT) cost the U.S. government about $80.6 billion in 2015. That was more than either the federal mortgage interest payment deduction (&69.5 billion) or the charitable giving deduction ($54.4 billion).
The SALT deduction has been around since the Sixteenth Amendment to the U.S. Constitution was ratified in 1913, giving Congress the right to tax incomes. But it is very controversial because it tends to subsidize liberal states that assess higher income and property taxes. As a result, taxpayers in just ten states are expected to take 62 percent of the SALT deductions. That amounts to an average $4,200 deduction in SALT deductions in those two states and just a $2,300 average deduction in the other 40 states.
As the state with the highest tax burden, California that amount to 12 percent of U.S. population, are expected to pocket 18 percent, or $17.1 billion of SALT deductions in 2017, according to an analysis by the Tax Policy Center. Due to the growth of taxation, Californians are expected to take $234 billion in SALT deductions over the next decade.
There are complicated rules that limit the total number of deductions federal taxpayers can take. But in general, the Democrat-controlled high tax states in West and Northeast claimed more deductions than states in other regions. The current SALT deduction provides a federal subsidy to higher-taxed states, since for every $100 increase in state taxes for an individual in the 35 percent federal tax bracket, the state keeps the $100 and the federal government loses $35.
About half the SALT benefit is reaped by the five percent of U.S. households with annual household incomes over $200,000. With high incomes and high taxes, California will reap 22 percent of SALT deductions in 2017.
Liberals argue that SALT is a good thing because it encourages states to levy higher taxes to provide more services than they would without the federal deduction. Conservatives tend to not value the higher levels of state services and argue that SALT is especially unfair to the seven states that currently do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Opposition to the elimination of the SALT deduction was expected from liberals who want to maintain their subsidies, but it is also coming from other lobbying groups. Although President Trump’s proposed tax reform does not eliminate federal deductions for mortgage interest payments, the real estate industry fears that doubling the standard deduction (another reform in Trump’s tax package) will make taxpayers less likely to itemize their federal tax returns to claim the mortgage deduction.
Wall Street hedge funds are complaining that their debt-leveraged buyouts of companies would suffer under President Trump’s proposed tax reform, because the cost of state taxes would increase, supposedly driving down investment, job creation, and profitability.
But the tech-savvy Quart blog called eliminating state and local deductions a “smart tax reform idea,” adding: “The fact that removing the SALT deduction hurts Democratic-leaning states more than Republican ones is part of what might make it politically feasible for Trump and congressional Republicans.”