Director of State Fiscal Research
Senate Finance Committee Chairman Orrin Hatch’s new tax plan would reportedly eliminate the federal deduction for state and local taxes (SALT), which lets taxpayers who itemize deductions deduct state and local property taxes and either state and local income taxes or general sales taxes, and use the revenue to pay for cutting income tax rates. As we’ve explained, that trade would be a bad deal for most Americans, especially low- and middle-income people, for two reasons — and the House approach of partially repealing the SALT deduction wouldn’t address either one.
First, while eliminating the deduction would — by itself — make the federal income tax more progressive, that ignores the actual tradeoff that the Senate plan proposes, which is to use the revenue from eliminating the SALT deduction to pay for net tax cuts that are heavily tilted to the top.
Second, the SALT deduction helps state and local governments fund public services that provide widely shared benefits. Because of the deduction, higher-income filers are more willing to support state and local taxes. Repealing the deduction would almost certainly make it harder for states and localities — many of which already face serious budget strains — to raise sufficient revenues in the coming years to invest in high-quality education, infrastructure, and other priorities that are crucial to the nation’s long-term economic prospects. State borrowing costs could also rise as bond rating agencies react to states’ reduced capacity to raise adequate revenue, making needed infrastructure projects more expensive. States and localities could also respond by raising other taxes or fees, which would push more costs on to middle- and low-income people and make state and local tax systems even more regressive overall than they already are.
Further, the proposal to end the SALT deduction, and thereby make it harder for states and localities to fund current programs, comes as the President and congressional Republicans propose in their ten-year budget plans to shift substantial new costs to states, by sharply cutting Medicaid and other health funding and potentially cutting federal support for state and local services such as education, transportation, environmental protection, and low-income housing.
These problems also exist in the House Ways and Means Committee’s bill, which would end the deduction for state and local income and sales taxes and limit the deduction for state and local property taxes to taxes under $10,000 — again, to pay for marginal income-tax rate cuts. That approach would have similar results to a full repeal.