Tax Law Triumph: Curtailing State and Local Tax Deductions Will Punish Spendthrift States
Late in December, President Trump signed the final version of the Tax Cuts and Jobs Act after it passed the House 227 to 203. Although even after becoming law and long championed by Republicans, it still saw 12 sitting House Republicans reject it. Did their concern come from worries over the deficit? No, instead it stemmed from a less amiable concern, protecting their states from having to face the reality of their big government tax bills. The no-vote Republicans came primarily from California, New Jersey and New York, some of the highest taxed states in America.
Their concerns are regarding the state and local tax deductions, commonly referred to as SALT. Currently, the deductions are unlimited, but now under the new law have been capped at $10,000. Specifically, SALT allows for individuals to write off either sales or state income taxes (usually income) to reduce their overall taxable income on the federal level. With this deduction now severely capped, many citizens in high-tax states will possibly see increases in their overall tax bills. And now unable to write off such large sums of cash going to their states, any savings from reduced federal marginal tax rates will be overtaken, or at the very least greatly reduced.
Cheering for a change that brings higher taxes to anyone isn’t something to be particularly giddy about, if that alone was the outcome. Yet, with some luck and political pressure, hopefully bitterness over higher taxes isn’t the endpoint. Instead, this could lead to a push for revamping fiscal policy in a more conservative fashion, something that under ordinary circumstances would seem impossible to achieve in deep blue states.
Some may worry that to subdue citizens angry over state taxes now having a larger impact on their overall income, high tax and high spending states may decide to lower taxes while continuing high levels of spending through more borrowing and deficit spending. After all, isn’t that exactly what the federal government does? Correct, but most states, including New York and New Jersey, are by state law legally required to pass a balanced budget without deficit carry over annually. This bars them from the same tactics the federal government has used to put off spending cuts and reforms.
Also, deep blue states like New York and New Jersey are not exactly as deep blue as they are often portrayed, if you dig past the surface level. Yes, on a national level they are almost always without exception represented by progressive Democrats, but on the state level a different picture arises. New Jersey has a Republican governor, Chris Christie (albeit outgoing and being replaced by a Democrat), and Republicans control the New York Senate, via coalition assistance of a group of independents who splinted from the Democrats. So, Republican influence, while limited, is not fully insignificant, further heightening the chances for some reforms once some Democrats begrudgingly join them after seeing all other options have been exhausted.
These changes are by no means destined to manifest immediately or even at all, but regardless if they do or not, American states with low taxes and prudent, restrained, spending habits will no longer be forced to federally subsidize their less responsible counterparts as much as before. That can leave advocates of fiscal restraint rightfully feeling victorious.
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