End of the State and Local Tax Deduction to Have Negative Effects
The state and local tax deduction (SALT) is on the chopping block following the passing of the 2017 Senate tax bill. The SALT deduction elimination will primarily impact the highest-tax states, which are typically Democrat-leaning.
While SALT is typically claimed by higher-income individuals and households, the SALT deduction’s middle-class claimants will also see the tool disappear, which will affect around 40%–50% of those within certain middle-class income brackets.
The move is being championed by its supporters as sales tax and income tax reform, while its detractors believe that it will leave many states with lesser budgets, a loss of industry, and a weaker economy.
SALT was used in two specific areas: as a deduction for income taxes or state sales taxes (whichever is higher) and as a deduction for state and local property taxes.
While the Republican Party (GOP) is typically averse to raising taxes in general, the SALT repeal was seen as a way to levy funds to help pay for the massive income and corporate tax cuts that were included in the recent tax reform bill, which is likely to benefit the highest earners in the country over lower-income households and the middle class.
Critics argue that SALT was intended to provide double taxation relief. What they mean by this is that instead of paying both state and federal income taxes—or in this case, being taxed twice on your income—SALT provided people with a tool to ease their local taxation amounts.
Donald Trump’s tax plan is likely going to lead to a loss of $1.4 trillion in government revenue (not accounting for economic growth), and the Republicans needed to find a way to help make up for that massive loss. They saw the SALT deduction elimination as the best method to do so.
While the deduction does primarily help higher-taxed individuals, due to the relief only being applied to itemized tax filings (which often require large charity donations, mortgage interest payments, and other similar costs in order to outpace standard state tax deductions), the knock-on effects of the bill could harm many middle-class households.
And that isn’t to say that no middle-class taxpayers benefited from the SALT deduction. One study found that 30% of taxpayers will be harmed by the SALT deduction elimination.
End of SALT Deduction Will Negatively Impact Economy in Highest-Tax States
One of the after-effects of the SALT deduction repeal that some fear is that richer individuals will flee higher-tax states and relocate to states with lower or no income tax at all, leading to a massive shift of wealth from the higher-tax states, many of which are left-leaning.
For instance, in California, the SALT deduction was seen as a huge boon to the state. Due to the unequal wealth distribution in the California economy, the highest earners would receive relief via SALT and, therefore, be incentivized to remain within the state. Following the repeal, these high earners may flee the state for cheaper pastures.
The SALT deduction served similar purposes in New York and New Jersey. Without it, some believe that these states will be hurt by the loss of income, as well as a potential departure of industry.
New York will be destroyed if the deductibility of state and local taxes is included in any final plan that passes the House.
— Andrew Cuomo (@NYGovCuomo) October 26, 2017
GOP’s SALT Deduction Repeal Will Lead to Losses for the U.S. Middle Class
While it is true that the SALT deduction elimination will mostly impact people making over $150,000 a year, that doesn’t mean that the middle class will be totally unscathed by the move.
The GOP’s tax bill, first off, is going to do little in the way of tax relief for lower- and middle-income households, according to several studies. SALT being cut in order to pay for this bill, therefore, may have a large impact on middle-class income for years to come, as other federal services are likely to suffer as a result of the massive revenue drain that will follow the Republican tax bill.
The impact of the SALT deduction on the U.S. middle class is going to affect about 38% of households that earn between $50,000 and $75,000, and about 53% of households earning between $75,000 and $100,000, according to a study by the Government Finance Officers Association, using IRS data.
This goes to show that while high-income tax filers received the highest relief from SALT, many middle-class households will still be hurt by the repeal.
“The Impact of Eliminating the State and Local Tax Deduction,” Government Finance Officers Association, last accessed December 6, 2017.
“The state and local tax deduction, explained,” Vox, November 2, 2017.
“Ray Dalio Says End of the SALT Deduction Will Further Divide the Nation,” Bloomberg, December 5, 2017.
“Millions in the middle class will feel it if GOP kills this tax break,” CNN, September 26, 2017.