By Karl W. Smith
Bloomberg News
The tax cuts of 2017 were widely maligned as being tilted in favor of the 1 percent. This is undoubtedly true when it comes to the reductions in business taxes.
Several changes to the personal income tax code, however, were highly progressive — in particular, the cap on state and local tax deductions.
That cap is set at $10,000, which is far more than most Americans would be able to claim. Furthermore, the law also increased the standard deduction. The result is that, according to official government estimates, less than 8 percent of taxpayers will be affected by the cap.
Nonetheless, state and local governments are looking for ways around the cap. Some are allowing taxpayers to make a (tax-deductible) donation to the state, allowing up to 95 percent of it to be credited against their state tax bill. The IRS has warned state and local governments that it would heavily limit the use of such of schemes. The states, in turn, have pressured the IRS to change its mind, and several have sued to have the tax law ruled unconstitutional. Sen. Robert Menendez of New Jersey has introduced legislation to have the cap repealed.
What neither the opponents of the cap nor its defenders are addressing, however, is that the cap is one of the most progressive parts of the law. Independent analysis by two of the tax nation’s leading tax-policy think tanks shows that most of the cost of the change will be borne by the wealthiest taxpayers.
The Tax Foundation, whose analysts tended to support the tax bill, notes that the benefits of eliminating the cap would be approximately zero for the bottom 80 percent of taxpayers. Only taxpayers in the top 5 percent would see a meaningful reduction in their tax bills. The Tax Policy Center, whose analysts took a more skeptical view of tax bill, estimates that the majority of the benefits from a repeal of the SALT cap would go to the top 1 percent of taxpayers, with more than a quarter going to the top 0.1 percent.
Most economists have long argued that the state and local tax deduction is inefficient as well as regressive. It encourages the tendency of wealthy families to isolate themselves in small, expensive municipalities. Those places can then use federally subsidized property taxes to support lavishly funded schools that are inaccessible to anyone outside their borders. This contributes to inequality in two ways. First, school districts that serve less advantaged students in the same metropolitan area have less property tax revenue. Second, schools for the children of the most well-off essentially receive a federal subsidy.
Opposition to the cap doesn’t arise from any principled objection. Instead, it is a reflection of naked self-interest and unthinking opposition to President Donald Trump.
I appreciate the desire of many Americans to resist the administration’s erosion of political and governing norms. I respect but disagree with those who argued that the president’s tax reform was either too costly or not progressive enough.
I cannot, however, understand the efforts to roll back the cap on state and local taxes — especially coming from the same crowd that, in other contexts, favors a more progressive tax system. Such attempts to do so — whether through the courts, complicated avoidance schemes or legislative repeal — are not only unwise but also hypocritical.
Karl W. Smith is a former assistant professor of economics at the University of North Carolina’s school of government and founder of the blog Modeled Behavior.
