About one-third of all US taxpayers would lose a popular deduction if the tax outline recently unveiled by President Trump ever goes into effect.
Trump wants to slash the corporate tax rate from 35% to 15%, and reduce 7 brackets for personal-income tax to 3, simplifying the tax code. Most individual filers would face a lower federal income tax rate. But that would cut federal revenue, and to make up some of the difference, Trump has proposed killing the federal deduction for state and local taxes, known as the SALT deduction.
Laws on the books for more than a century allow workers who pay income and property tax to their city and/or state to deduct the state and local portion from the federal portion. So if you paid $1,000 in total state taxes and your gross income was $20,000, you’d be able to deduct $1,000 from your income and pay federal tax on just $19,000, at whatever federal rate applies. Essentially, that rebates a portion of the state and local taxes paid to the taxpayer.
This one deduction costs the federal government nearly $100 billion in revenue per year, making it one of the costliest “tax expenditures,” or givebacks that help people lower their tax bill. The biggest such tax break is the exclusion of employer-paid health insurance from income, which costs the government (and saves taxpayers) nearly $240 billion per year. The mortgage-interest deduction virtually all homeowners with a mortgage claim costs the government (and saves taxpayers) about $70 billion per year.
Trump’s tax blueprint is an outline, not a detailed plan, and the White House says most of the details will be worked out with Congress in the coming months. But Trump may have targeted the state and local income tax deduction because it seems like a give-with-one-hand-take-with-the-other scheme that simply complicates the tax code. Conservatives have argued for years that the SALT deduction subsidizes state and city governments, which isn’t Washington’s job. The deduction may also create an incentive for states and cities to raise taxes higher than they otherwise would—since the feds will essentially cover part of the cost.
Even if that’s true, the deduction has been there since the dawn of the federal income tax system as a way to allow states and cities to collect taxes for the services they provide, without taxpayers being taxed twice. There have been other efforts to kill this deduction, but states and cities—through governors and mayors—are powerful lobbyists, and they’ve blocked prior attempts to kill the deduction.
There’s a populist element to Trump’s idea, since the SALT deduction benefits wealthy filers more than lower-income ones. It only applies to people who itemize their deductions, and those tend to be high-income Americans with complex financial lives (particularly those in states with high property taxes). Only one-third of all filers itemize, but 81% of those earning more than $100,000 do. In that group, the average SALT deduction is $12,300, according to the Tax Policy Center. Filers who don’t itemize instead claim the standard deduction, which Trump wants to double. That would let him claim he’s helping the little guy at the expense of the rich.
Any tax change that creates winners and losers—especially losers—is bound to bear a withering assault from those who would lose out. States and cities are probably as powerful as any lobby on Capitol Hill, so final tax legislation—if it ever gets that far—may look nothing like Trump’s starting blueprint.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.