Reopen America — and repeal the SALT limitation
A defining characteristic of the Tax Cuts and Jobs Act (TCJA) passed into law in late 2017 is the significant limitation imposed on the deductibility of state and local income, property and sales taxes. The so-called “SALT deduction” was capped at $10,000 per tax year. The SALT deduction limitation or “cap” has had the greatest impact on those taxpayers owning high-value real property, residing in high-tax jurisdictions, or earning high incomes generally (for whom historically itemizing deductions has been more advantageous than claiming the standard deduction).
While several elements of the TCJA have been attacked from various quarters at the time of its passage and subsequently, perhaps foremost among such criticisms has been the depiction of the SALT cap as an explicit “screw the high-tax blue states” effort, as New York magazine so delicately put it in 2018.
Fast-forward to 2020 and the same urban areas and high-tax regions impacted by the SALT cap are suffering disproportionately through no fault of their own as a result of the COVID-19 pandemic and the related economic shutdown implemented to “flatten the curve” of infection. As a long-time New York City resident (but having grown up in a purple state, long since turned a deep shade of blue), I try to be careful not to consider public policy issues through a tinted lens of self-interest. I proudly cast my first New York state-level vote for governor in support of tax-cutting George Pataki, and despite my residency I am susceptible to the argument that wasteful high-tax local jurisdictions should not be subsidized by other parts of the country through the federal income tax code.
These federalist principles aside, I believe a stronger practical case can be made for removing the SALT cap in the wake of COVID-19. As readily evidenced by infection and mortality rates, our urban regions have been disproportionately harmed by the pandemic and are likely to endure longer shutdown periods and associated job losses and business failures, as well as greater risks associated with any subsequent waves of outbreak. Small businesses, in particular, will be more heavily impacted by long and sporadic periods of closure and uncertainty, confronting both reticent customers and workers in these regions most likely to be among the slowest to return to pre-pandemic behavioral norms.
Our major metropolitan areas also are our primary entrepots for commerce, trade, immigration and tourism, and are our nation’s portals to an interconnected world. The resurgence of nationalism around the globe notwithstanding, trade and travel will remain critical to the economic health of nations, and our major metropolitan regions will continue to serve the assimilation functions they have provided our great melting pot, along with the ambassadorial role they have always played in promoting “Brand America.”
Perhaps most essentially, allowing families and sole proprietors who file federal taxes as individuals to keep more of their own money is classic supply-side economic policy administered to those jurisdictions now most desperate for a prompt and powerful revival of the animal spirits of market capitalism. Any rock-ribbed economic conservative should agree that in the wake of serial rounds of transfer payment-oriented economic stimulus, allowing taxpayers to keep more of their own money is far more efficient than recycling tax dollars or borrowings into stimulus programs. A corollary benefit would be the ensuing supply-side demonstration project, one illuminating the benefits of a lower tax burden on economic activity to an urban audience more accustomed to the siren song of soft socialism, ranging from the Green New Deal to bans on plastic bags.
Lastly, at the time of the act’s passage some had asserted — from arguably mean-spirited premises — that it is the fault of voters in high-tax jurisdictions that they bear more onerous state and local tax burdens than experienced elsewhere, that other localities should not be forced to subsidize such spending, and accordingly they “deserve” the consequences of the SALT cap. Again, this assertion, while facile, is fallacious — or at the very least incomplete. More densely populated areas’ contribution to American economic, cultural and civic life is such that it is a debatable proposition as to who is subsidizing whom.
Not only is repealing the SALT cap good policy, it’s good politics. It gives President Trump the opportunity to show purple states and suburban voters in all-important Pennsylvania and Michigan that he stands with them in defense of their pocketbooks. It also gives congressional Democrats the chance to show that they can legislate effectively on more than just a reactive and emergency basis.
It’s easy to create straw-man opposition to SALT cap elimination. There are certainly defensible arguments that can be martialed involving general “fairness,” or more specifically those concerning the proper distribution of the tax burden among regions and different levels of government in a federal state. With such comprehensive and equitable tax reform not currently in prospect, SALT limitation repeal offers an immediate, actionable and supply-side tool for jump-starting our country’s essential economic nerve centers.
Nor should SALT cap elimination be considered a blue-state bailout. The pension problems of Illinois and other (mostly) blue states are the fault of state and local jurisdictions and their decision makers and will have to be resolved separately and accordingly. In light of today’s exigencies, to characterize SALT cap repeal as a giveaway is to misunderstand the actual choices available and the decisions being made in Washington (see stimulus plans 1.0, 2.0, etc.). Even the most ardent red-state conservative should see the merits of allowing citizens and small-business owners to keep more of their own money when compared to the alternative of recycled stimulus dollars being borrowed, redistributed, and ultimately levied against the patrimony of future generations.
The choice is clear. Reopen America and let (economic) freedom ring.
Richard J. Shinder is a financial services executive in New York and founder of Theatine Partners, a financial consultancy. In a 25-year Wall Street career, he has worked in various advisory, principal and managerial roles for firms including The Blackstone Group, Goldman Sachs and Perella Weinberg Partners, among others. Follow him on Twitter @RichardJShinder.