One of the most contentious provisions of the 2017 Republican Tax Plan is the proposed elimination of the federal deduction for paid state and local taxes – SALT. Many middle-class families have relied on SALT deductions for decades in their financial planning and life budgeting needs. The result, if passed in the final legislation, could result in a large tax increase for these families. Members of Congress from the affected states, including some Republicans, oppose this provision.
It is impossible to fund any layer of government without revenue. As we all know, the federal government collects income taxes from individuals and corporations. State and local governments collect income taxes, sales taxes, property taxes, or any combination thereof. Most of the states with income tax do so to meet their obligations or provide a higher level of services expected by their citizens, such as schools, health care, and infrastructure. The converse is also true and states with more minimal tax bases entertain their citizens acceptance of lower levels of services and some rely on federal subsidies to meet their obligations.
Republican legislators pushing to eliminate SALT deductions assert that the deduction is an unfair subsidy to taxpayers in states with an income tax borne by those taxpayers in non-income tax states. Supporters of the SALT deduction claim eliminating it would unfairly punish them for demanding higher services from their state governments and other states could demand the same from their leaders. Both arguments have some merit, but what the debate appears to forget is that the federal government already makes up the difference and closes the gap.
Income tax states, including New York, California, Massachusetts, Connecticut, and others have been subsidizing states with lower tax bases, including Alabama, Mississippi, Louisiana, and others. The former contribute far more resources to the federal government while the latter receive far more subsidies from the federal government. Ironically, these receiving states willingly take the subsidies to meet their obligations while then criticizing the paying states for their tax burdens. Even worse, there is a trend whereby those receiving states are stealing jobs from the tax paying states because they can undercut them with corporate enhancements. The problem is the federal subsidies to those states allow them to do this, thus further hurting the paying states. Considering the heavy burden absorbed by these paying states, the small benefit to taxpayers from SALT deductions is more than fair and helps a little to ease some of their taxpayer burden. When you look at the entire picture, it is clear there is no subsidy for the paying states from the SALT deductions, thus that argument is invalid,
If Congress votes to eliminate the SALT deduction, they should then also end the more unfair subsidies by the tax paying states for the benefit of the resource receiving states that allow them not to collect taxes from their own citizens. It may never have been fair to allow the receiving states to “mooch” off the paying states just to avoid collecting taxes from their own citizens, but it would be even worse to continue this practice after eliminating the small benefit of SALT deductions. Maybe that should be addressed in the tax plan…