Stop pouring SALT into taxpayers' wounds

Stop pouring SALT into taxpayers' wounds
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One of the worst-kept secrets in Washington is that some blue-state members of Congress are squeamish about eliminating the state and local tax (SALT) deduction.

Perhaps hoping to capitalize on this uncertainty, the U.S. Conference of Mayors released a report on the impact of the elimination of the SALT deduction on taxpayers. The latest salvo in an ongoing barrage of misinformation that proponents of the SALT deduction have been using to defend it is riddled with misleading claims.

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The SALT deduction is a massive federal tax cut for wealthier Americans that encourages states to keep their own taxes high, and Congress should ignore the background noise and eliminate it.

 

Taxpayers should ask themselves why the U.S. Conference of Mayors is so determined to protect the SALT deduction. With the SALT deduction in place, state and local governments can levy higher taxes, as policymakers know that the federal government will pick up part of the tab.

This encourages state and local governments to pursue a high-tax, high-spending agenda that harms taxpayers and fiscal health. Look no further than Illinois, where the spiral of tax hikes and failure to reform spending have led to mediocre GDP growth and near-junk bond status for its debt.

In July, Illinois residents were hit with yet another 32-percent tax hike on state taxes, added on top of the nation’s highest property tax rate. Irresponsible policy has led to a severe pension funding crisis, leaving government employees wondering whether they will ever see the retirement money they were promised. Such hardship as the residents of Illinois face today should not be encouraged across the country.

Unfortunately, the U.S. Conference of Mayors seeks to do exactly that by attempting to mislead the public on how the SALT deduction functions. Most of the claims in the report should be followed with the phrase “...assuming no other changes.”

But of course, the whole point of broad-based tax reform is that there would be other changes. For example, the U.S. Conference of Mayors allege that eliminating the SALT deduction would hurt 30 percent of taxpayers, the percentage of filers that claim it.

But, changes to SALT come in the context of tax reform that cuts rates for all low- and middle-income taxpayers. Such a blanket claim is irresponsible without evaluating other changes that would impact the burdens faced by current claimers of the deduction.

Context is lacking throughout the report, as it is for many arguments made to defend the SALT deduction. The U.S. Conference of Mayors is clearly aware of the income levels of those claiming SALT deductions, as they choose only upper-income example tax filers to illustrate the impact of eliminating SALT.

Thus, it’s no wonder that they fail to mention important statistics such as the fact that less than 5 percent of filers with an adjusted gross income (AGI) under $25,000 claimed the SALT deduction in tax year 2015, while over 90 percent of filers with an AGI over $200,000 did.

A closer look at the distributional impacts of the SALT deduction underscores that its benefits flow primarily to wealthier Americans. An analysis of 2015 tax year filings by the National Taxpayers Union Foundation found that over 91 percent of the benefits of the SALT deduction flowed to filers with an AGI of $75,000 or more, while barely 1 percent went to filers with an AGI under $30,000.

Defenders of the SALT deduction, such as the U.S. Conference of Mayors, often argue that SALT protects against “double taxation.” This argument misunderstands what double taxation is.

Double taxation occurs when income is taxed twice to finance the same set of government-provided benefits and services, such as when shareholder dividends are taxed by the federal government after already being taxed via the federal corporate income tax.

State and local taxes, on the other hand, do not represent a form of double taxation. While no one enjoys being taxed by multiple sources, each layer of government in the United States’s federal system provides a different set of benefits and services.

If taxpayers wish to reduce their overall tax burden, they should instead push for lower state and local taxes. Of course, this is precisely the outcome that the U.S. Conference of Mayors wishes to avoid.

It is time to stop allowing federal tax policy to encourage higher taxes among state and local governments. Eliminating the SALT deduction is an important component of comprehensive tax reform, and Congress should not allow political interests to subvert good policy.

Andrew Wilford is an associate policy analyst with the National Taxpayers Union Foundation and the co-author of NTUF’s recent report on the SALT deduction. Follow him on Twitter @PolicyWilford.