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Debate on state and local tax deduction ignores its origins
The current reframing of the state and local tax, or "SALT," deduction is a clear departure from the original principles outlined during the 1913 implementation of the U.S. Constitution's 16th Amendment.
Rather than today's "red versus blue" or "rich versus poor" paradigms, the SALT deduction, based on an earlier precedent established during the Civil War, was focused on preventing federal intrusion and dominance over state and local taxation.
SALT was one of six original deductions in the 1913 federal tax law, the genesis of today's IRS code, paving the way for the creation of the federal income tax. SALT was a bedrock principle, appeasing opponents of the day who feared that federal taxation would overwhelm state and local taxation.
Unfortunately, the concept of America's federalism - the balance of power among federal, state and local governments - is absent from today's debate. Partisan ideology now supersedes a serious national commitment to intergovernmental cooperation and problem solving, eroding our ability as a nation to ensure all levels of government are working together to optimize our taxpayer resources.
Dating back to colonial times, local governments have used property taxes to support local public safety, community health and other essential services to protect and serve our residents. By 1796, state and local governments in 14 of the 15 states taxed land. Counties, like public K-12 school systems, still rely heavily on property taxes as our core revenue source.
Today, America's 3,069 county governments have far reaching responsibilities, tasked with tackling some of the most complex societal issues of the day. Counties operate and support nearly 1,000 public hospitals, often with a focus on critical access and trauma services, and more than 600 long-term care facilities for seniors and people with disabilities.
Counties operate most local jails, with a disproportionate percentage of the nearly 11 million inmates each year suffering from mental health and substance use disorders. Counties maintain nearly 45 percent of public road miles and four out of 10 public bridges. Counties also operate and support thousands of public libraries, parks, community centers, business parks, job training services, and in nearly a dozen states, community colleges.
Counties are frontline providers of public health, behavioral health (including mental health and substance abuse), environmental stewardship, emergency preparedness and response, senior and child protective services, and election administration.
To generate a massive amount of new federal revenue, the new cap on SALT deductions not only increases the real costs of taxpayers to support state and local services, it disproportionately punishes a specific subset of Americans: individual homeowners.
The federal tax code now creates a double standard, allowing businesses, including rental property landlords, to deduct the full value of their property taxes as a business expense. Meanwhile, families and individuals who achieve the American dream of homeownership are capped at only $10,000. State and local taxes are mandatory and should not be treated as optional like other federal deductions.
Moody's chief economist, Mark Zandi, calculated in October 2019, that home prices are 4 percent lower than anticipated under previous federal law. Allan Sloan of ProPublica further estimates that the slower growth of home values translates into "a $1.04 trillion setback for the nation's homeowners." For many Americans, homeownership is not only a major source of pride but also asset and wealth accumulation.
From a county perspective, another frustration is the troubling combination of federal policymakers limiting local government investment and autonomy while simultaneously imposing more unfunded (and underfunded) mandates on these same local institutions.
The SALT cap, for example, increases the real costs of state and local taxes for individuals and families, while harming the ability of local governments and public schools to invest in the core building blocks of vibrant communities like public safety, education, infrastructure and health services. This is another reason SALT was an original federal deduction, recognizing the primary roles of state and local governments in financing activities in the broader public interest.
The SALT provision has been hijacked as a new, nearly $700 billion federal piggybank. While arcane budget rules tagged the SALT deduction as "lost" federal revenue, it was money the federal government never received, ever. The new SALT cap now simply shifts taxpayer resources - and decision-making control - away from states and local communities to the national level.
Now is the time to reframe the SALT debate back to the real issue: those who benefit from the deduction are not just those taxpayers who claim the deduction. All Americans benefit from a system of federalism that supports local decision-making and investment. At the end of the day, public services are delivered locally.
Congress should fully restore the SALT deduction for families and individuals, putting them on a level playing field with businesses and landlords. And, even more pertinent today, we should recommit to respectful intergovernmental partnerships that balance national, state and local resources and priorities.
Matthew D. Chase is the CEO/Executive Director of the National Association of Counties (NACo), based in Washington, D.C. NACo is the voice of America's 3,069 county governments, representing nearly 40,000 county elected officials and more than 3.6 million county employees.