Harm from Recent Limitations to the SALT Deduction?
Ways and Means, Subcommittee on Select Revenue Measures, How Recent Limitations to the SALT Deduction Harm Communities, Schools, First Responders, and Housing Values, June 25, 2019
Before learning how limitations on SALT deductions harm communities, schools, first responders and housing values, we must first determine if they do or not. This all depends on whether local jurisdictions feel that they cannot increase, or worse feel that they must decrease, their tax rates in response to the recent tax reform (which we assure you, we are no fans of, as we demonstrate in the Attachment).
In the recent Great Recession, some states kept services at current levels and others were forced into deep cuts until they agreed to increase property tax rates to account for lower housing values, leaving revenue static and keeping services in place. To assume that the loss of the SALT deduction through higher standard deductions for some and their reduction for others is to assume that America Legislative Exchange Council member governments were correct in not wanting to increase property tax rates. Again, this is not the case.
In 1998, the Washington, D.C. Financial Management Authority commissioned a study to determine if wealthy taxpayers would flee if their income taxes were increased. The study found that they did not. Future Mayor Anthony Williams pushed back efforts by certain Members of the Council seeking to lower taxes to take into account the District’s renewed financial health as the result of federal legislation relieving the District of pension liabilities for public safety and educational professionals and certain other state functions. No one left.
No one will leave the high tax states where taxpayers (who are also donors, as they were in the District) no longer have access to the SALT deduction. I cannot imagine leaving an apartment in Midtown Manhattan or a mansion in the Hamptons or Kings Point, etc., just because a tax cut was lost. I can imagine the same taxpayers asking for special consideration to keep political donations flowing to local officials, who are more dependent on such contributions due to less attention to their down ballot offices.
The Tax Cut and Jobs Act likely lowered tax burdens for most of the higher income SALT deduction users. I could not foresee such a tax bill leaving any millionaire behind. Rather than figuring out how to revisit the issue of lower deductibility, Congress should consider increasing these tax rates. Until then, states should have no qualms in increasing tax rates for those who benefited from the TCJA.
If state income tax rates are relatively flat at higher income levels, states should create higher rates for such income ranges. Indeed, some states have. Rather than jumping on a SALT repeal bandwagon, they should imitate those who have clawed back federal tax cuts and especially those who have increased tax benefits for families after having done so, as should the Ways and Means Committee.
Real comprehensive tax reform (rather than the faux reforms of the TCJA) could end this problem by shifting funding of domestic military, civil and entitlement spending to a menu of consumption taxes (both invoice and subtraction/net business receipts), while a high income and dividend surtax and an asset VAT fund overseas, strategic and sea deployments (which are usually debt funded), net interest and debt repayment. Attachment Two provides further information on how tax reform would work.
Lest we forget, we have a problem with long term debt. Restoring tax breaks to high income local taxpayers will not help this. Attachment Three from our book, The Future is Calling: It Wants a Refund, shows why this is important and who debt reduction will benefit most. Unless people start buying my books en masse, it will not be my daughter, but it will likely be the children and grandchildren of members of Congress and especially their donors.
Before learning how limitations on SALT deductions harm communities, schools, first responders and housing values, we must first determine if they do or not. This all depends on whether local jurisdictions feel that they cannot increase, or worse feel that they must decrease, their tax rates in response to the recent tax reform (which we assure you, we are no fans of, as we demonstrate in the Attachment).
In the recent Great Recession, some states kept services at current levels and others were forced into deep cuts until they agreed to increase property tax rates to account for lower housing values, leaving revenue static and keeping services in place. To assume that the loss of the SALT deduction through higher standard deductions for some and their reduction for others is to assume that America Legislative Exchange Council member governments were correct in not wanting to increase property tax rates. Again, this is not the case.
In 1998, the Washington, D.C. Financial Management Authority commissioned a study to determine if wealthy taxpayers would flee if their income taxes were increased. The study found that they did not. Future Mayor Anthony Williams pushed back efforts by certain Members of the Council seeking to lower taxes to take into account the District’s renewed financial health as the result of federal legislation relieving the District of pension liabilities for public safety and educational professionals and certain other state functions. No one left.
No one will leave the high tax states where taxpayers (who are also donors, as they were in the District) no longer have access to the SALT deduction. I cannot imagine leaving an apartment in Midtown Manhattan or a mansion in the Hamptons or Kings Point, etc., just because a tax cut was lost. I can imagine the same taxpayers asking for special consideration to keep political donations flowing to local officials, who are more dependent on such contributions due to less attention to their down ballot offices.
The Tax Cut and Jobs Act likely lowered tax burdens for most of the higher income SALT deduction users. I could not foresee such a tax bill leaving any millionaire behind. Rather than figuring out how to revisit the issue of lower deductibility, Congress should consider increasing these tax rates. Until then, states should have no qualms in increasing tax rates for those who benefited from the TCJA.
If state income tax rates are relatively flat at higher income levels, states should create higher rates for such income ranges. Indeed, some states have. Rather than jumping on a SALT repeal bandwagon, they should imitate those who have clawed back federal tax cuts and especially those who have increased tax benefits for families after having done so, as should the Ways and Means Committee.
Real comprehensive tax reform (rather than the faux reforms of the TCJA) could end this problem by shifting funding of domestic military, civil and entitlement spending to a menu of consumption taxes (both invoice and subtraction/net business receipts), while a high income and dividend surtax and an asset VAT fund overseas, strategic and sea deployments (which are usually debt funded), net interest and debt repayment. Attachment Two provides further information on how tax reform would work.
Lest we forget, we have a problem with long term debt. Restoring tax breaks to high income local taxpayers will not help this. Attachment Three from our book, The Future is Calling: It Wants a Refund, shows why this is important and who debt reduction will benefit most. Unless people start buying my books en masse, it will not be my daughter, but it will likely be the children and grandchildren of members of Congress and especially their donors.
posted by Michael Bindner at 10:00 AM
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