While the debate still rages over the effect that salt has on the health of Americans, another form of salt, the state and local tax deduction (SALT), is harmful to our federal tax code and, more importantly, bad for hardworking American taxpayers.
As we all know, our current federal tax system is a mess. It is convoluted, inequitable, inefficient and in need of a complete and total overhaul. One big ticket item that stands in the way of achieving fundamental tax reform for the first time in 31 years is the SALT tax preference — worth an estimated $1.3 trillion over the next decade.
{mosads}As old as the income tax code itself, SALT allows certain individuals — only the minority of taxpayers who itemize — the ability to deduct some taxes paid to state and local governments. It can present a conundrum for policymakers seeking to both provide much needed reform to the tax code while not being seen as “raising” taxes on individuals.
However, support in Washington for raising net revenue from tax reform is non-existent, so the argument that repealing SALT is a “revenue grab” is laughable. Instead, repealing the SALT deduction will allow that $1.3 trillion to be used to reduce tax rates for all individuals and business.
Let’s not forget the fact that not all tax cuts are created equally. Reducing marginal tax rates has the most impact on future economic growth that our nation so desperately needs.
While some state and local elected officials may attempt to make the case that repealing SALT amounts to “double taxation,” the claim is dubious at best. The federal government collects revenue for its services, while state and local governments are charged with collecting taxes for the services they provide.
If these state and local officials truly believe in their abnormal definition of “double taxation,” they could simply make federal income taxes deductible on their state and local returns. That’s completely within their power to achieve, but only a handful of states allow federal deductibility.
The SALT deduction is both a distorting facet of the tax code and a total disincentive to state and local governments to keep their own fiscal houses in order. It’s time to call SALT what it truly is — a horrible subsidy aimed to placate high-tax states.
Nationally, about 20 percent of the SALT deduction goes to just two high-tax states: California and New York. The SALT deduction functions like a shell game between Washington, D.C. and state capitols.
Washington keeps the deduction in the code, and state governments feel emboldened to continue their tax-and-spend ways because itemizers get most of it back on their tax return anyway. To that point, Gov. Bill Walker (I-Alaska) used the SALT deduction as the reason why Alaska should adopt a state income tax for the first time in more than 30 years.
High-tax states like California, New York, Illinois and New Jersey — and the Republicans in Congress representing them — are now facing what Ronald Reagan called “a time for choosing.” They were collectively elected by tens of millions of Americans to finally bring some semblance of sanity to the federal tax code.
That means making it fairer, more equitable and as free from negative distortions as possible. Will there be winners and losers? No less so than the current system, in which low-tax states — well-run states, one might say — are effectively subsidizing other states to continue their tax-and-spend ways.
While the economics of repealing the SALT deduction may be clear, there is good reason why the great Ronald Reagan called the provision the most sacred cow in the tax code.
The army of lobbyists who have descended upon Congress to argue for the retention of the SALT provision, along with the organized pressure campaign against selected House members, is impressive in a political sense. Unfortunately, for proponents of the SALT deduction, the economics of the issue are not on their side.
Although President Reagan was successful in signing our last fundamental reform 31 long years ago, he was not able to kill the sacred cow of the SALT deduction. Let’s hope this Congress achieves real tax reform in 2017 and completes the unfinished business of Ronald Reagan’s 1986 tax reform.
Doing away with the state and local tax deduction corrects a fundamental unfairness in the current tax structure and provides an opportunity to reduce tax rates for all hardworking taxpayers.
Jonathan Williams is the chief economist of the American Legislative Exchange Council (ALEC), an organization of state legislators dedicated to the principles of limited government, free markets and federalism. He’s also the vice president of the Center for State Fiscal Reform.
Sal Nuzzo is vice president of policy at The James Madison Institute, a free-market think tank headquartered in Tallahassee, Fla.