The SALT Deduction: Giveaway To The Wealthy?
(edited from a Bloomberg article)
Some call the SALT deduction a giveaway to the wealthy. The optics are bad. But the deduction for state and local taxes (SALT) actually serves a purpose. That’s why it’s been law since the first federal income tax under President Abraham Lincoln in 1861.
* The SALT deduction combats–imperfectly—tax competition, which is a destructive race to the bottom in taxes and government services. A state that slashes tax rates and balances its budget by simultaneously reducing services to the poor wins two ways: It gets an influx of businesses and residents from higher-tax states, and it chases away poor people, who make their way to those high-tax states that are losing their tax base, an unsustainable dynamic.
* The SALT deduction restrains tax competition by subsidizing high-tax states: the pinch that taxpayers in those states feel from high state and local taxes is eased by the break they get on their federal returns.
* Voters in low-tax states sometimes ask why the federal government should be subsidizing states that choose to impose high taxes: some of the benefits of high-tax states’ higher spending are shared by people in low-tax states. The safety net for the poor. The roads and other public infrastructure available to residents and visitors alike. When you add up all the flows, high-tax states on average contribute more to the federal coffers than they get in return.
* Restoring full SALT deductibility would reduce federal tax revenue a lot making it less popular. It’s also true that most of the benefits would go to high earners, but that’s not necessarily a permanent condition. State governments constantly weigh how much they can tax their richest residents without driving them away. Since the revised tax law enacted in 2017, the effective state and local tax burden on rich people in so-called ‘blue’ states has gone up.
* Some rich people are bailing out of their states although Congress wisely left the full deduction in place for corporate income taxes because corporations are more mobile than individuals.
* If the SALT deduction cap remains in place, state governments are going to be forced to stanch the bleeding by cutting taxes on their rich residents. Rich people can move; they will be OK whether the cap stays or goes. Restoration of full SALT deductibility isn’t for their sake and wouldn’t make much difference to them in the long run. It’s the high-tax states like New York and California that need help.
“It’s wrong for people to be taxed on the federal level for money they no longer have because it was taxed away at the state or local level. This adverse consequence of double taxation between
federal and state tax systems in a federal system has not received proper attention. Mitigating double taxation has been a fundamental building block of both the international and interstate tax order.” – William Barker, Penn State Dickinson Law School. Barker asks whether it wouldn’t be better if Congress went beyond restoring full deductibility of state and local taxes from their taxable income and give taxpayers an outright credit on their federal taxes for whatever they paid in state and local taxes, limited to some percentage of their total federal tax liability?
Personally, I believe that if the full SALT deduction is not re-instated, those who may be short-term beneficiaries will regret the long-term consequences. When tax laws don’t factor in cost-of-living differences ultimately they will fail. Killing the goose that lays the golden egg is never wise. Collecting more taxes on less almost always nets less.
I feel terribly for so many buyers right now – and their agents – as they navigate the hyper-competitive, increasingly less affordable markets throughout most of the USA. Not only are they competing in a low-interest environment with significant pent-up demand, under-supply, under-building, increased consumer savings and credit scores, Spring optimism, a clear path to the end of the Covid nightmare as vaccine administration soars, inflation, rising prices, institutional investors competing with them……possibly even more daunting is GEN-NEXT, a large group of potent homebuyers reliant on inherited or transferred wealth…..and no, they are not necessarily just millennials in age.
Many of my peers in their 50’s are dealing with aging parents right now. Realistically, many of them will – and are already – inheriting from their parents as they reach the end of life. If the average US lifespan is around 80 years old, and the average age of giving birth is approaching 30 years old, you do the math. Inheritance is not something merely assigned to the super-rich. The average American has a net worth of around $177,000 at death. In wealthier cities, this number jumps automatically, often driven simply by real estate values. Regardless of the size of the inheritance, this cash infusion is often the driver of heirs to buy a home.
Wealth amongst the wealthier – not necessarily just the rich – is often distributed well before death. Sometimes this is done so for taxation and estate planning purposes, but often it is done to help kids get going in life, especially as they form families. Few can afford to gift a kid $5 million, but many more can afford to gift $25,000. Many trusts require young heirs to spend on investments, education, or real estate, not Ferraris.
My point is that while we are all clearly aware of the GREAT WEALTH TRANSFER – over $750 billion per year in the US alone – we may not be as aware that the beneficiaries will be of ALL age groups, anywhere from super-young grandkids, all the way up to those in their 70’s and older. It has started already and will grow notably. GEN-NEXT is an age-agnostic demographic!