The House Republican tax plan would eliminate a federal tax deduction for state and local income or sales taxes, and it modifies a deduction for state and local property taxes. The Senate bill eliminates the deductions entirely. These provisions have sparked criticism from lawmakers from states that would be largely affected.
Who uses the deduction and how would changing it affect them? We’ll take a look at the facts.
What is the state and local tax deduction?
Taxpayers who itemize their taxes can deduct state and local property and real estate taxes, and either state and local income or sales taxes. The ability to deduct nearly all state and local taxes was part of the federal income tax code when it was created in 1913. Some restrictions were put in place over the years, such as allowing either income or sales tax deductions, but not both. See the IRS guidelines on the deductions for more information.
The deductions for all of the state and local taxes is worth about $100 billion in 2017, according to projections from the Joint Committee on Taxation.
Who takes it?
Thirty percent of tax filers itemize, rather than claiming the standard tax deduction, and 95 percent of them claimed a state and local tax deduction in 2014, according to the Tax Foundation. The same figures held for 2015, when 44.7 million tax filers claimed itemized deductions on their returns, according to IRS data. Higher-income households are more likely to itemize, so they are more likely to claim the deduction. “About 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81 percent of tax filers with incomes exceeding $100,000,” the Tax Policy Center says in a brief on the topic.
Some high-income households, however — about 5 million — are required to pay the alternative minimum tax, which reduces or eliminates the SALT deduction. The AMT, as the Tax Policy Center explains, “requires many taxpayers to calculate their liability twice—once under the rules for the regular income tax and once under the AMT rules—and then pay the higher amount.”
Taxpayers in certain states are more likely to take the deduction because they live in high-income and high-tax states. “Six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of the deduction,” the Tax Foundation says. Some of those states are also among the most populous.
The Pew Charitable Trusts has created interactive maps that show the percentage of filers in each state claiming the deduction and the average amount claimed by those who take it. For instance, 45.7 percent of tax filers in Maryland in 2015 took the state and local tax deduction, with an average claim of $12,931, while at the opposite end of the spectrum, 16.9 percent of filers in South Dakota claimed an average deduction of $6,098. The maps also show breakdowns for only income, sales or real estate tax deductions.
The average claim nationwide in 2015 was $12,471.
How would it change under the GOP plans?
The House tax bill would eliminate the deduction for state and local income or sales taxes, and it would limit the property tax deduction to $10,000. The Senate bill fully repeals the deductions.
How does the property tax deduction differ from the overall SALT deduction?
Both the Tax Policy Center and Tax Foundation have written that the property tax deduction on its own skews more benefits toward middle-income taxpayers than the overall state and local tax deduction.
The TPC estimated that the top 20 percent of income-earners get 84 percent of the benefit from the SALT deduction, but they get 67 percent of the benefit from the property tax deduction alone.
Twenty-five percent of tax filers in 2015 claimed a property tax deduction, according to IRS data.
Taxpayers in certain states are still more likely to take the property tax deduction. “Just six states (California, New York, New Jersey, Texas, Illinois, and Florida) claim more than 50 percent of the property tax deduction,” the Tax Foundation says.
What impact would the GOP changes have on taxpayers who now take the deduction?
The impact for individuals would vary, and would depend on how the rest of the tax bills affected the taxpayer. Certainly some households would see a drop in how much they are able to claim as itemized deductions. But what that means for the amount of taxes owed would depend on other provisions in the tax plans, such as changes to marginal tax rates.
Under the GOP plans, for instance, fewer taxpayers would itemize their taxes. That’s because the plans nearly double the standard deduction and eliminate other deductions, making itemization unnecessary for a larger percentage of tax filers. Taxpayers would only itemize if doing so would result in a larger deduction than the standard one. The Tax Policy Center said in its analysis of the House bill that the number of taxpayers who itemize would be 75 percent lower in 2018 and 65 percent lower in 2027, when 20 million tax filers would itemize.
As for the House bill’s $10,000 cap on the property tax deduction, the average deduction claimed was about half that in 2015, the TPC says. But “the average amount claimed for taxpayers with incomes above $200,000 was $10,250,” the TPC says, with higher averages in some states.
“The $10,000 cap would of course limit the benefit for the highest income earners,” Jared Walczak, a senior policy analyst at the Tax Foundation, told us in an email. “At the average U.S. effective property tax rate of 1.08%, a home would have to be worth nearly $926,000 before the property tax deduction is reached. Under current law, however, a very significant percentage of filers with homes above that amount are already subject to the alternative minimum tax, which eliminates the benefit of the state and local tax deduction.”
Would getting rid of the deduction amount to “double taxation,” as critics claim?
Lawmakers in high-tax states have made this argument. Democratic Sen. Chuck Schumer of New York said in a Nov. 2 press conference that some areas, like Long Island, are “willing to pay more taxes for education,” but they “shouldn’t have to pay a double tax because that’s their choice.” And several Democratic representatives, in another Nov. 2 press conference, repeatedly made the claim that the GOP proposal amounted to “double taxing middle class families.”
Republican Rep. Peter King, also of New York, argued on ABC’s “This Week” on Nov. 5: “And since 1913, it’s been a principle not to have a tax on a tax,” referring to the state and local tax deduction being part of the original income tax code.
Americans Against Double Taxation, a coalition of groups representing governors, cities, educators and more, argues that eliminating or limiting the deduction “would represent double taxation on local residents, as these taxes are mandatory payments for all taxpayers.”
But is a “tax on a tax” the same as “double taxation”?
The Tax Foundation says that the definition used by those supporting the SALT deduction isn’t what we normally think of as double taxation. “When two taxes levied by a single government, or similar types of governments (for instance, multiple states), fall disproportionately upon the same income or economic activity, this represents a clear case of double taxation,” Walczak wrote in a March brief on this topic. But this is a case of different government entities taxing income for “discrete sets of services.”
We’ll leave it for readers to judge whether the term “double taxation” is acceptable in this case. But we’ll note that some claims leave misleading or false impressions. House Minority Leader Nancy Pelosi said at a Nov. 2 press conference that if you “don’t want your income taxed twice, you lose.” But in states with income taxes, your income would be taxed twice — by the federal and state governments. What’s not being taxed by the federal government under current law is the amount paid for state taxes.
Who’s subsidizing whom?
Both opponents and supporters of the current SALT deductions have argued that some states are “subsidizing” others, or that the current or proposed tax policies are “unfair.” President Donald Trump, for instance, said in a Fox News interview that states like California and New York “really are being subsidized by states like Indiana and Iowa.” Rep. King, meanwhile, argued that New York doesn’t get as much back in federal services as it pays in federal taxes. “We already get treated unfairly,” he said on ABC’s “This Week.”
Whether the tax system or GOP proposals are “fair” is a matter of opinion. Both sides make some valid points, though, on how taxes and benefits flow to and from the states.
The Tax Policy Center says that the SALT deduction “provides an indirect federal subsidy to state and local governments by decreasing the net cost of nonfederal taxes to those who pay them.” The TPC offers an example: For a taxpayer in the 35 percent marginal income tax bracket, an increase in state income taxes of $100 really has a net cost of $65, because federal taxes for that taxpayer would be reduced by $35 with the SALT deduction. “This federal tax expenditure encourages state and local governments to levy higher taxes (and, presumably, provide more services) than they otherwise would. It also encourages those entities to use deductible taxes in place of nondeductible taxes (such as selective sales taxes on alcohol, tobacco, and gasoline), fees, and other charges,” TPC explains.
A September report from the Rockefeller Institute of Government, a think tank at the State University of New York, also explains that “some states ‘receive’ far more federal spending than their residents or economies pay through taxes, while others ‘give’ far more than they get.” It found that 13 states paid more in federal taxes than they received in federal spending, including New York, California, New Jersey, Texas and Illinois, five of the six states claiming more than half of the SALT deduction benefits.
Update, Nov. 10: We updated this story to reflect the fact that the Senate Committee on Finance has released details of its tax plan.