SALT Deductions
In 2017, Congress passed the Tax Cuts and Jobs Act, which instituted a $10,000 cap on itemized deductions for state and local taxes (SALT). Thus, someone who itemizes deductions on their Federal tax return and paid, say, $5,000 in local taxes could deduct it all from their gross income. But if a high-end taxpayer paid $20k in local taxes, they could deduct only $10k.
The SALT cap is set to expire in 2025, and political battle lines are being drawn. Congress could either raise or eliminate the cap, lower it, keep it as is, or even disallow SALT deductions entirely. If they raise or eliminate the cap, then our high-end taxpayer could deduct the whole $20k.
The SALT cap battle primarily affects high-income earners in high-tax states. New York and California lead the pack, especially in the wealthy counties around New York City and San Francisco. Connecticut, New Jersey, and Illinois follow close behind.
Your favorite blogger has invested a lot of brain cells contemplating this issue. Where should a liberty-minded citizen stand? It gets complicated.
Many conservatives, and even some libertarians, say: Eliminate the $10k cap, and allow unlimited SALT deductions. Bigger deductions mean lower overall taxes! And lower taxes is the goal, right?
Joining this chorus is John Tanny, professional investor. Writing in the WSJ, he advocates eliminating the cap so to help “keep our money out of Washington.” Ergo: instead of going to Washington DC, high-tax states keep more tax money at home. Tanny says that, if Californians and New Yorkers want big government, and are willing to pay for it, well, that’s their prerogative. What happens in California and New York stays in California and New York!
Not so fast.
For us cynics, problem #1 is that it puts a lot of faith and trust into voters choosing wisely. In a perfect world, voters would carefully analyze the impact of election outcome and how it affects the economy, society, stability, and even their own fortunes. But your typical voter does not really do this. Rather, they often make choices based on all sorts of goofy criteria, such as: candidate popularity, name recognition, advertising & media presence, personal charisma, good looks, or sheep mentality (who everyone else favors). Or non-negotiable party loyalty. Or perhaps they only care about one single issue(abortion, global warming, etc.). Or they overestimate one politician’s power over a complex, dynamic system such as the economy, as in: “If the economy improves, I’ll vote for the incumbent, otherwise, I’ll vote for the challenger!” Or they only look at government benefits, assuming it would be paid for with OPM (Other People’s Money). Worse of all: they just choose randomly. I debunked a lot of this voter-intelligence garbage in this article.
The reason that California and New York have big, expensive governments is not necessarily because voters actively and consciously chose that option. Rather, they bought the political sales pitch and just didn’t think things through.
You can vote against all this unlimited local government growth all you want - but you’ll probably be outvoted and outnumbered. So if you want to make an impact, and the ballot box is not working, what will work?
Easy: Vote with your feet! Pack up and move! To a new neighborhood, or to a new city. Or to a new state.
Here in America, the politicians have not (yet) taken away that freedom. So if taxes, regulation, bureaucracy, crime, or the cost of living become too much where you now live, execute your option, and go live someplace else.
A lot of high-earning Americans are doing just that, and taking their money, their taxes, and often their businesses and all those jobs with them. They’re moving out of California and New York, headed for economically-friendly places like Texas and Florida, leaving big-government advocates and the gimme-gimmies behind. When voters vote like this with their feet, it gets attention. Lots of attention.
Plus, there are other good reasons for removing SALT deductions. For one, it simplifies things. Federal income tax compliance is way too complicated. Taxes should be simple enough to do on the back of a dinner napkin. This is one small step in that direction.
And finally, all this emphasis on reducing taxes is misplaced. Yes, SALT deductions may reduce overall tax revenue; however, it’s spending that needs to cut. Government, at all levels, spends too darn much. Don’t buy that phony-baloney “starve the beast” argument that cutting revenues (via deductions or whatever) will bring about fiscal discipline.
If we truly want to stop endless government growth, then let’s end SALT deductions completely, and make high-end taxpayers feel the full pain of local governmental profligacy. Then when they start leaving, perhaps the message may finally get through.