Normally, Americans would be coming up on our deadline to file tax returns. This year, that deadline’s been extended due to the COVID pandemic. This gives us extra time to file, and to understand the various deductions and credits we might qualify for.
Everyone loves the party icebreaker game called “Two Truths and a Lie.” Which is not true about the State and Local Tax or SALT deduction:
A. The SALT deduction primarily benefits wealthy taxpayers.
B. The SALT deduction encourages high-tax states to raise taxes even higher and forces low-tax states to subsidize it.
C. Repealing the cap on the SALT deduction would help struggling middle-class families, especially those who have lost jobs due to coronavirus closures.
A. True. Prior to the 2017 Tax Cuts and Jobs Act, the SALT deduction allowed taxpayers who itemize to deduct all of their state and local income or sales taxes along with all of their property taxes. According to the Joint Committee on Taxation, in 2014 a whopping 88 percent of SALT deduction benefits went to taxpayers with incomes over $100,000 while just 1 percent went to taxpayers with incomes below $50,000. The 2017 tax cuts imposed a $10,000 cap on this federal deduction.
B. True. The state and local deduction enabled high-tax states to levy higher taxes on high-income taxpayers by reminding them that they could deduct these taxes from their federal tax obligations. This is a perverse incentive. Raising taxes brings revenue in the door of high-tax states which they use to fund increased and potentially wasteful public spending. Notably, just six states (California, New York, New Jersey, Illinois, Texas, and Pennsylvania) claim more than half of the value of all SALT deductions nationwide. Meanwhile, low-tax states end up subsidizing this federal benefit.
C. Lie. The lion’s share of taxpayers who claim the federal state and local tax deduction earn incomes above $100,000. Repealing the $10,000 cap on this deduction will give high-income taxpayers in high-tax states some relief but not the low-wage workers and middle-class families who take the standard deduction. Reducing taxes for restaurant servers, cashiers, and salon stylists along with the rest of America is a good way to help these workers get back on their feet once their workplaces reopen. Rolling back the SALT deduction is not.
Speaker Nancy Pelosi has signaled she plans to undo the $10,000 cap on the SALT deduction. Despite her claims that this would provide economic aid for working-class Americans, the proposal is really a partisan effort to boost coffers for high-tax states that tend to be left-leaning so that they can increase (wasteful) spending.