Dragons are hard to kill. Just ask the Lannister clan. We should now add the GOP to our list of failed dragonslayers, albeit they’ve staggered the beast. But is this write-off wielding, deduction breathing tax dragon known as the State and Local Tax Deduction (SALT) friend or foe? In defending certain provisions of the Tax Cuts and Jobs Act (TCJA) we’ve heard much chatter from conservatives about Red states subsidizing Blue states. This argument was used as de facto justification for capping SALT at $10,000 per year. The cap an apparent appeasement to Blue state Republicans who vigorously resisted an outright kill. It’s a provocative charge, that Republican leaning states are somehow supporting their Democratic neighbors. Could it be true? It’s one thing to throw such a haymaker, quite another to land it.
One knock on SALT is its regressive nature as a tax scheme. As income rises, the rate at which one is taxed falls. SALT opponents say this feature makes it unfair by shifting a higher tax rate onto lower income individuals, while the more well-heeled are taxed at the more desirable lesser rate. Remember, we are talking tax rates and not tax burdens. As such, this doesn’t necessarily mean the overall amount owed by persons of lesser income will be greater. We speak proportionality here.
Conservatives are not up in arms over the fairness of SALT though. What really sticks in their craw is the fact that Blue states can levy just about any amount of state and local tax they please. This doesn’t sit right with the only function of government is funding the military type folks. What is not fully understood is that state government pre-dates federal government. That’s what makes these shenanigans so perplexing. It turns centuries old, commonsense tax policy on its head. Instead of federal taxes being paid after state and local, they will now be paid before. The power tilt toward the federal government is immense and I suspect many haven’t absorbed the full impact and consequences.
Conceived as a way to shield state revenue from federal intrusion, and avoid the dirty business of double taxing, SALT deductions first appeared during the American Civil War. Introduced as a provision of the Revenue Act of 1862, it highlights concerns even some 150 years ago, about the encroachment of federal taxation into the arenas of state and local government. It appears the issue was of such importance it was included in America’s first income tax law. This from a country who less than 100 years previous had rebelled over another, more celebrated, issue of tax. If we can discern anything from people in the age of Lincoln, it’s that they knew a tax man hustle when they saw one.
The crux of the argument for SALT then is this; if an individual is paying one set taxes to state and local government, they should be allowed to deduct that amount from their taxable income before a federal assessment is made. Have a look at it with numbers. If my total income is $100,000 and I pay $20,000 in state and local taxes, then my federal tax liability should be based on an income of $80,000. If it’s not, and I’m taxed on an income of $100,000, I’m being taxed twice on $20,000. To alleviate this, the SALT deduction was introduced. A lot has changed since 1862. Human chattel is no longer permitted, for instance. Indeed, a lot has changed. One thing that hasn’t is the concept of levying a tax twice on one income. That is the same as it ever was.
Conservatives talk a good game with their clamor for smaller federal government and stronger states’ rights, it’s a mantra, but it’s a confidence trick. What they really want is a smaller federal government and sway over the amount of revenue states themselves can raise from taxation. They want smaller government at all levels. With TCJA they’ve gotten their wish. The law breaks with Federalist principals on taxation that is wholly inconsistent with stronger states’ rights. Federalism promotes power sharing between state and federal government. With TCJA we have the converse.
Looking to the birth of the country, you see states being very aware of encroachment by the federal government. Irrespective of what other might think, this still holds true today. It’s not a question of fairness, it’s a question of authority. By removing the deduction, the federal government is saying their taxes take precedence. A state’s power to levy tax has been usurped. This was not the intention laid out by the framers of the United States Constitution. How could it have been? At the time the Constitution was ratified a federal income tax didn’t exist. Now that we have one, if you are not allowed to deduct state and local taxes, you are being taxed twice.
Republicans may spin it in any which way they like, but without SALT it’s double taxation and it’s the reason a deductibility provision was included in the Revenue Act of 1862. Federal tax liability was to be calculated only after state and local taxes were deducted. For those on the pointy end of a federal double tax, there is no room for the esoteric deliberations of tax eggheads. Whether it be 1862 or today, the effect is the same—you are paying tax on monies already paid as tax.
To be clear, TCJA represents a severe degradation of states’ rights and federal government infringement into a state’s internal revenue affairs. You have one area of government invading another. It’s a misappropriation of the very idea of federal government and represents a very substantial shifting of power from states to the federal government. To be equally clear, this development is a Republican construct.
The result of the repeal is that state and local governments will have less money for their projects and interests. This is a problem. It’s exactly the reason it wasn’t liked in the 19th century. It’s the reason it’s not liked now. Republicans would like to engage us in a race to the bottom, mirroring what has happened with many Red states. Dilapidated infrastructure, sub-par schools, scant social services. If Blue states think the federal government will pick up the slack, as many Republicans from these states seem to believe, they should brace themselves for the rudest of awakenings.
Blue states have an ace in the hole and it must be employed. They pay far more to the federal government than they receive. This must change. If it does not, it will represent a devastating blow to net donor states. Forking over billions upon billions of surplus dollars while the services that define these states get abolished is a sucker punch to the solar plexus financially. Blue states are no longer in the driver’s seat when it comes to running their governmental affairs. If this remains the case, the surplus given to the federal government must drastically be reduced. In a fair and equitable world.
The claim that Red states subsidize Blue states through a so-called loophole in the tax code just doesn’t hold up under scrutiny. What is lost on Republicans is that the primary function of state and local government is to provide services via taxation. The belief that these activities are in some sense paid for by the federal government (or other states) through subsidies in the federal tax code is absurd. States should have the freedom to tax its people for services they deem best. After that is complete, the federal government may levy its tax. Provided it’s on income that accounts for state and local taxes already paid. This is the very essence of statehood. When the federal government usurps this authority you no longer have a state. You have a province, subject to the beck and call of a federal government.