One of the most important reforms in the 2017 tax reform legislation was the $10,000 cap on the deductibility of state and local taxes (SALT) such as property taxes and sales taxes. Limiting the deductibility of such taxes has long been a priority of center-right tax reformers.
However, high-tax states imposed tremendous pressure on Congress and the Trump administration to drop the SALT provision while the tax reform was being debated. Thankfully, the Trump administration held firm.
For too many years, high-tax states have been subsidized by low-tax states through the federal tax code. If you lived in a high-tax state, because you could deduct your state taxes from your federal taxes, you didn’t really care all that much about the fact that you lived in a high tax state. So high tax states were being enabled by the federal tax code and thus there was little pressure from taxpayers in those states for politicians to rein in taxes.
Residents of low-tax states didn’t receive the same benefit.
The net effect was that the federal tax code sheltered residents of high tax states from the consequences of those higher taxes. Capping the deduction was designed to end this subsidy for high-tax states, as well as to ensure that the overall tax reform was not viewed as a “tax cut for the rich.”
Did the SALT provision have a disproportionate impact on high-tax states? Absolutely. Was that unfair? No, because the cap disproportionately affects states that have disproportionately high taxes. That’s their problem and the whole point of the reform. The $10,000 cap applies to every federal taxpayer, regardless of which state they reside in.
A few days ago, a federal District Court in Manhattan rejected a lawsuit by the state of New York that challenged the cap on SALT taxes, finding that the cap was fully within Congress’s power to tax and not discriminatory against taxpayers in New York.
Duh.
Now, hopefully, taxpayers in New York, California, New Jersey, Minnesota and Hawaii—the states with the highest state taxes—will begin to pressure their elected representatives to rein in and even reduce property and sales taxes, or perhaps state income taxes.
But the cap on SALT taxes will also begin affecting even red and reddish states with high property taxes—even states like Texas, which has no income tax but relatively high sales and property taxes. Already, upper middle-income residents of Texas are running into the cap on SALT taxes.
That’s still a good thing because taxpayers should feel the brunt of taxes. That pain encourages them to demand that their elected representatives keep taxes as low as possible.
October 2, 2019