This piece originally appeared in the New York Post.
Gov. Cuomo and Mayor de Blasio found common cause this week, publicly denouncing the Republican effort at tax reform. Cuomo said the plan “puts corporations over people,” while de Blasio said it would “rip off the middle class.”
Their central concern: the rule allowing taxpayers to deduct state income (or sales) taxes and local property taxes on their federal tax return. The current Senate plan would eliminate it, while the House plan would keep a limited property-tax deduction.
It’s no surprise Democrats are defending the state-and-local-tax deduction: The largest per-family benefits are found in blue states like New York, New Jersey, California, and Massachusetts.
What is surprising, however, is their specious argument that middle-income earners would be hardest hit. The reality is the opposite.
House Democratic Leader Nancy Pelosi tweeted that “50% of households that claim State Local Tax deduction make under $100K — now @SpeakerRyan wants to throw it away.”
Her math is correct but misleading. Wealthy families are four times more likely to utilize SALT than other families. Only 24 million of 125 million tax filers earning under $100,000 take the deduction, typically lowering their taxes by $1,000. By contrast, 20 million of the 25 million filers earning over $100,000 take the deduction and typically save $4,000 (and often much more), even accounting for the Alternative Minimum Tax.
In fact, half the savings accrue to the richest 5 percent of taxpayers — and in New York, half of the SALT savings go to families making over $500,000.
To see why, imagine state income taxes rising by $1,000 for each family. A wealthy family in the 40 percent bracket may deduct that $1,000 and see its federal taxes fall by $400 (subject to the AMT). A family in the 25 percent bracket receives a $250 federal income tax cut. The 70 percent of taxpayers who don’t itemize their income taxes — often middle and lower incomes — receive zero federal income tax relief. That’s the system Cuomo and de Blasio are defending.
A second argument is that, without SALT, voters would be less willing to expand state and local governments: SALT essentially bribes voters to support state and local government tax increases by offering federal tax cuts that replenish as much as 40 percent of the cost. This has allowed state and local governments to expand as much as 20 percent larger than taxpayers would have allowed without Washington’s bribes.
That said, states could survive just fine without SALT. Washington already distributes $686 billion annually to state and local governments. Any additional state assistance could be offered more equitably through direct grants.
The bigger problem is that SALT allows residents of high-tax states to automatically cut their federal taxes, shifting the federal tax burden to other states. New Yorkers are free to vote themselves a more generous state government, but why should that decision be subsidized by taxpayers in states with more limited governments?
A third argument is that most of these affluent, high-tax states already pay more in federal taxes than they receive back in spending, and thus need SALT to redistribute money back to them. This is a bizarre complaint coming from deep blue states that continue to elect lawmakers who explicitly promise to redistribute federal funds from their own wealthy communities to needier ones.
They’re free to elect candidates who broadly promise less redistributive policies.
The final argument, used by Republican SALT defenders and, recently, Cuomo, is that paying federal taxes on the amount paid in state and local taxes is double taxation. This makes no sense.
Federal taxes finance federal benefits, and state taxes fund state benefits. There is no reason that higher state and local taxes should bring automatic federal tax cuts.
Even retaining the House’s deduction for property taxes would disproportionately benefit wealthy taxpayers, encourage local government growth and drive up housing prices, all while limiting the savings available for broader tax relief. If compromise is necessary, retaining the deduction for state income taxes would be better for the economy, because (for all its faults) it essentially reduces state marginal income-tax rates and thus modestly encourages work.
Americans claim they want to simplify the tax code, eliminate upper-income tax breaks and expand tax relief for the middle class. We will soon discover whether they mean it.
Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter @Brian_Riedl.
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