Proponents of an unlimited SALT deduction say they are seeking to help middle-class taxpayers. If so, they should go back to the drawing board. The top 20 percent of American households, ranked by income, would receive 96 percent of the benefits of the change, according to a detailed analysis by the widely respected Urban-Brookings Tax Policy Center.
The primary beneficiaries would be an even smaller group of the very wealthiest Americans. The 1 percent of households with the highest incomes would receive 54 percent of the benefit, on average paying about $36,000 less per year in federal income taxes.
The SALT deduction cap is unfair. The deduction is often described as a federal subsidy for state and local governments because the federal government effectively is paying for a portion of each dollar in state and local taxes. Capping the deduction has the effect of providing a smaller subsidy, per dollar, to jurisdictions that collect more money in taxes.
New Yorkers, who pay higher taxes than most Americans, get more extensive and higher quality public services. Residents of other states choose lower taxes and less government. Federal tax policy should provide consistent support for either choice.
This board historically has opposed the elimination of the federal subsidy. But the rise of economic inequality has increased our focus on the distribution of taxation and led us to a different conclusion: Instead of eliminating the SALT deduction cap, Congress should eliminate the deduction.
The SALT deduction is an inefficient subsidy. The primary beneficiaries are the wealthy people who get a tax break. It would make more sense to collect those dollars from the wealthy and then to provide direct federal financial support to state and local governments.
Proponents of an unlimited SALT deduction have worked hard to portray the cap as a burden on a broad portion of the population. This is wrong in two important respects. First, the existence of the SALT deduction is the primary inequity. It shifts the distribution of taxation off the shoulders of the wealthy and onto the shoulders of the majority who do not make enough money to itemize tax deductions. The bigger the deduction, the greater the inequity.
Second, lifting the cap would primarily benefit the very wealthy. The Tax Policy Center estimates that 16 percent of households making between $100,000 and $200,000 annually would benefit from an unlimited SALT deduction, but that the average benefit would be just $130. Almost everyone making more than a million dollars a year would benefit — on average by more than $44,000.
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