It’s not double taxation to pay different governments for different services.
One of the top things that tax policy should seek to avoid is double taxation. That’s why the inheritance tax, for example, is bad tax policy. A person pays income taxes his entire life on money that he earned. There is no good reason to tax it again after he dies. The business tax code is especially full of double taxation that harms economic growth and costs American jobs and investment.
Advocates for the state and local tax (SALT) deduction will often try to twist this correct principle of tax policy into an argument for their cause. Representative Mike Lawler (R., N.Y.) was the latest to do so, urging Congress to raise the deduction cap from $10,000 to $40,000 because “to double tax, New Yorkers or Californians, is wrong.”
Superficially, it can feel like double taxation to pay federal taxes and state and local taxes, in the sense that you’re paying taxes to two different entities. But that’s exactly what makes it different from double taxation. It’s not double taxation to pay different governments for different things.
It is a bedrock principle of American government that the states are not mere administrative divisions of the country. Federalism means states have their own tax and spending powers that exist independent of the federal government. As a result, each American lives in more than one tax jurisdiction. It is not double taxation for each of them to tax you separately.
State and local governments do not provide the same services as the federal government. The federal government provides military protection, Social Security, Medicare, diplomacy, veterans’ benefits, national parks, and many other services that state and local governments do not. State and local governments provide education, transportation, law enforcement, child protective services, record-keeping, state and local parks, and many other services that the federal government does not.
When you pay state and local taxes, you are paying for different things than when you pay federal taxes. That’s not double taxation.
Calling it double taxation is akin to accusing your car insurance company of double-charging you because you also had to pay your home insurance company, as they both provide you with insurance. That’s true, they are both providing insurance, but it’s insurance for different things, so it’s perfectly reasonable to pay for it separately.
Not only is it reasonable, it’s actually good. It would be unfair if a person with a very expensive car got to subtract the high cost of their car insurance from their home insurance bill. That would mean other home insurance policyholders with less expensive cars would be indirectly subsidizing the person with the very expensive car, since the overall risk in the home insurance pool is the same regardless of the cars they own.
In the same way, it is not fair for people from high-tax states to be able to write off their tax expenses on their federal returns. They should not bear a smaller share of the federal tax burden than they otherwise would because their states burden them more than other states burden their taxpayers.
The argument for the SALT deduction boils down to saying, “Because I pay more for state and local government services, I deserve to pay less for federal government services.” You don’t. The federal government has its own revenue needs independent of the revenue needs of any given state or locality. Your tax contribution to the Navy or the FBI should not decline in proportion to your contribution to state universities or local libraries.
That’s why there should not be a SALT deduction at all. Notice that no one ever argues that you should be able to write off your federal taxes on your state return, even though all the same “double taxation” sophistry could be applied the other way. (That’s probably because it would mean nobody would have to pay state taxes at all, since federal taxes are greater.)
Capping the SALT deduction at $10,000, as Republicans did in 2017, was a step toward eliminating it. They did not index the cap to inflation, and they also doubled the standard deduction, meaning far fewer taxpayers itemize their deductions in the first place. Keeping the SALT cap at $10,000 and continuing to increase the standard deduction in line with inflation, as the Senate has done, keeps the SALT deduction on track for elimination.
And Republicans didn’t cap this deduction to raise taxes. They capped it to lower taxes. The basic premise of the Tax Cuts and Jobs Act, and of conservative tax reform more generally, is to broaden the base and lower the rates. That means subjecting more income to taxation by removing deductions and exemptions that distort behavior and make the tax code a pain, then lowering the percentage of income taxed so that taxes go down overall. That’s what Republicans did in 2017, and it made the tax code a lot better.
As for the taxpayers in New York and California, I feel for you. It is very sad that your state governments are irresponsible and that the Democrats who run them are not doing anything to get your gigantic budgets under control. But that isn’t the federal government’s fault, and federal tax policy is not the avenue through which to solve your problems. The problem is that your state governments spend too much money and tax you in accordance with that spending. Other states don’t do this, and taxpayers who live in those states should not be forced by the federal tax code to indirectly subsidize your politicians’ recklessness.