I have rarely agreed with U.S. Rep. Alexandria Ocasio-Cortez (AOC) on anything—especially tax policy. Yet here we are, opposing unlimited SALT deductions together. State And Local Tax deductions are paid for by you and me, yet they go to the wealthiest people in the country.
SALT deductions work like this: If choosing itemized deductions on your federal income tax return, you can deduct the state and local taxes that you paid when calculating your income that is subject to federal income tax. Basically, paying more in state and local taxes (whether income, sales, or property taxes) means you can pay a little less in federal income taxes.
When your income is measured in the millions—or billions—of dollars however, then that little less is a lot more. Before the cap on SALT deductions, almost all the benefits from the deduction went to the top income quintile. A full quarter of the tax deduction went to the top 0.1% while a mere 4% of the tax deduction went to the entire middle class, at a value of just $27 per middle-class taxpayer.
That changed with the 2017 tax reform, which capped the SALT deduction at $10,000. This affected hardly any lower- or middle-class families, but it forced high-income earners to pay more of the burden of living in a high-tax state or municipality. Many Democrats in high-tax states want to repeal the cap so that their wealthiest constituents can receive the tax subsidy again. AOC wants to keep the cap in place because she believes the wealthy are not “paying their fair share,” and she supported the recent New York tax hike on millionaires.
To be sure, whether or not the wealthy are paying their fair share is irrelevant. AOC’s “soak the rich” strategy has never worked, which is why New Yorkers have been fleeing the state’s high taxes for years. While her talking points may sound attractive, they are bad economic policy.
But let us not get too far off the rails—I did say, after all, that I agree with her on the SALT deduction issue. However, the real reason for opposing the unlimited SALT deduction—or any SALT deduction for that matter—is not just because it is a giveaway to the rich, but because it is a giveaway to fiscally irresponsible state and local governments. It is a subsidy for those financial basket-case governments that is paid for by people in financially responsible states. Tax dollars from Texas and Florida are used to replace lost tax dollars in California and Connecticut.
Put simply, this system punishes good behavior and rewards bad behavior.
There is no excuse for so perverse an incentive as this. If a state wants to raise taxes and frivolously spend the taxpayers’ money, then that state should be free to do so—provided that its residents bear the full cost of doing so. It is not only economically inefficient to be subsidizing wasteful states at our expense; it is morally wrong.
While eliminating the cap on SALT deductions shifts tax burdens from high-income earners to low-income earners, it also shifts the burden from states that have fiscally run themselves into the ground, à la Illinois and New York, and puts that burden on Texas and other states that have largely been responsible with their budgets. If you are looking for an unfair tax policy, that is it.
The solution in this instance is crystal clear: There should be no federal income tax deductions for state and local taxes.
It is just another example of how our inordinately complicated federal tax code creates more inequality instead of reducing it. While repealing the SALT deduction in its entirety would certainly be preferable to the current situation, at least the cap is an improvement over where we were in 2016. (We must not let the best be the enemy of the good.)
Though I did not think I would be writing this today, I agree with AOC. The faux-populist “Sandy” Cortez may be wrong about 70% tax rates, Modern Monetary Theory, and Medicare-for-All, but at least she is right on this—even if her motive is wrong. Then again, as T.S. Eliot noted,