The Trump tax law capped the amount of state and local tax payments a household can deduct from its federal income taxes. This was a major change in the tax code: Before the new 2017 law, households could deduct all of their state and local property-tax payments, and either their state sales tax or state individual-income tax payments. Now, these deductions are capped at $10,000.
On Tuesday, the Treasury Department released an audit finding that the cap will hit 11 million tax filers this year.
Blue states (and some red states, as well) are howling. From the New York Times:
Many Democrats, and some Republicans, from high-tax states denounced the limit as unfair. Shortly after the law’s passage, state and local lawmakers in New York, New Jersey and similar states proposed various novel efforts to allow their residents to work around the caps — for example, by allowing local property tax payments to be classified as charitable contributions, which are deductible but not subject to the SALT cap.
Despite their concern, the Trump tax law did the right thing in capping the state-tax deduction. In fact, Congress should go all the way and fully repeal it, as I discuss in my latest Bloomberg column.
First, remember that even though several million tax filers are losing this deduction, most of them are still paying less in total taxes than before the Trump tax law took effect. Only about 5 percent of households will pay more in taxes under the new law than they would have under the old code.
The state and local deduction shrinks the federal-tax base, requiring higher marginal rates. It encourages itemizing, which amplifies the harm done by other tax expenditures.
And it’s a subsidy to high-income, high-tax states. If the citizens of New York, New Jersey, and California want their state governments to offer relatively more services, that’s entirely their business. It’s a feature of our federalist system that some states will make different choices than others about the quantity and quality of services state governments offer to their residents. But the rest of us shouldn’t be on the hook for financing these decisions.
Check out my full argument over at Bloomberg. Your comments, as always, are very welcome.