As part of the Tax Cuts and Jobs Act of 2017, Republicans capped the state and local tax (SALT) deduction at $10,000. This was an important provision as it helped offset revenue losses in the least harmful way possible. Most tax-reform advocates recognize that the SALT deduction is wasteful, inefficient, and regressive. This is why Reagan tried to eliminate it as part of the 1986 tax reforms. Nonpartisan advocates of tax reform should be celebrating Republicans’ recent success in chipping away at it.
This has not stopped some Democratic partisans from framing the SALT-deduction cap as part of a sinister plan to punish blue states. New York governor Andrew Cuomo called it a “dagger in the heart of New York and California.” Several blue states have introduced complex tax-evasion schemes in response, while their attorneys general have filed lawsuits over it. In a recent Bloomberg column, journalist Paula Dwyer went so far as to claim it part of “Trump’s war against blue states.” As evidence, Dwyer points to the disparate impact the cap will have on two blue states, New York and California, as compared with two red states, Mississippi and West Virginia — and concludes that partisanship is the obvious explanation.
Looking beyond partisanship, there are three reasons why the cap might affect some states more than others. A cursory examination of these factors as they play out in the four states discussed by Dwyer reveals that to the extent partisanship played a role, Republican partisanship led to good SALT deduction reforms while Democratic partisanship seeks to undo it.
1) New York and California residents have higher incomes than Mississippi and West Virginia residents. Taxpayers must choose to itemize in order to claim the SALT deduction. Itemizing is worthwhile only for taxpayers with higher incomes. Otherwise it makes more sense to claim the (now expanded) standard deduction. Whether you rank states by GDP per capita or proportion of tax filers with adjusted gross incomes above $200,000, New York and California consistently rank near the top, while Mississippi and West Virginia consistently rank at the bottom. The disparate impact of the SALT deduction is part and parcel of a progressive tax system.
2) New York and California have higher home values than Mississippi and West Virginia. One of the primary ways people build wealth is through buying a house. A higher home value gives you more equity, but it also means you pay more in property taxes — and thus benefit more from the SALT deduction. When we look at median home values, New York and California consistently rank near the top, while Mississippi and West Virginia consistently rank at the bottom.
3) But overall tax burdens are not any heavier in New York and California than in Mississippi and West Virginia. Defenders of the SALT deduction often argue that red states would see more benefits if they raised taxes on par with blue states. Higher taxes might mean larger SALT deductions. When we look at state and local revenues as a percentage of personal income, though, we find that Mississippi and West Virginia rank just behind New York in the top 10 while California is only ranked 15th. Differences in tax burdens simply do not explain differences in SALT deduction benefits in these cases.
Journalists, pundits, and think-tank fellows continue to perpetuate the myth that only partisanship could motivate Congress to curtail the SALT deduction. The reality is that the SALT-deduction cap affects New York and California more than Mississippi and West Virginia because the former are rich while the latter are poor.