There’s a new study from the National Bureau of Economic Research out today called “Did the 2017 Tax Reform Discriminate against Blue State Voters?” It’s a fairly interesting exercise, looking at how much extra money individuals will have to spend and calculating that, if the law is made permanent,
the average percentage increase in remaining lifetime spending under the TCJA is 1.6 percent in red states versus 1.3 percent in blue states. Among the richest 10 percent of households, this differential is larger. Rich households in red states enjoyed a 2.0 percent increase compared to a 1.2 percent increase among the rich in blue-state households. This gap is driven almost entirely by the limitation on the SALT deduction. Excluding the SALT limitation from the TCJA results in a spending gain of 2.6 percent for rich red-state households compared to 2.7 percent for rich blue-state households.
Good to know. But this is not proof of discrimination. Rather, it shines a light on the discrimination that took place in the old system.
The SALT deduction, as you may know, allows taxpayers to deduct their state and local tax payments from their federal returns. So when a state chooses to hikes its own taxes, it also secures its residents a tax break from the federal government, which in turn eventually has to either raise taxes or cut spending nationwide to make up for the lost revenue. This spreads the burden around to states that didn’t choose to hike their own taxes.
The paper itself notes that “for those that itemize, SALT deductibilty acts as a federal subsidy for state and local tax collections at the rate of [the individuals’] marginal federal tax rate.” And oddly enough it does not use any form of the word “discriminate” except in the title, the most prominent words in the entire text.
It is not discrimination against blue states to limit a deduction that subsidizes blue states. The truly non-discriminatory thing to do would be to eliminate it entirely.