The deduction for state and local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es paid is taking center stage today as a possible revenue increase for tax reform under the “Big Six” plan. While it’s not specifically enumerated, it is strongly hinted that eliminating this deduction is a central part of the framework.
Currently, federal taxpayers are allowed to deduct the greater of their income or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. liabilities and their property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. liabilities. Over a 10-year period, the deduction costs $1.8 trillion. After the mortgage interest and charitable giving deductions, it’s one of the largest tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s in the tax code.
My colleague, Jared Walczak, wrote a fantastic primer on the subject earlier this year, but I wanted to make a few key points, given the swirling conversations on the topic.
- The deduction disproportionately benefits high-income taxpayers. Only 30 percent of Americans itemize deductions on their tax returns, with only 28 percent of filers taking this specific deduction. The overwhelming majority of Americans do not take this deduction.
- Of those that claim the deduction, almost 90 percent of the deduction flows to those with incomes in excess of $100,000. The deduction favors high-income individuals who are concentrated in high-tax states. Six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of the deduction. But what is missed in that point is that those high-income individuals tend to be concentrated in and around large metropolitan areas. The distribution of the deduction is not monolithic within a state. In Pennsylvania, for instance, individuals claiming the deduction are centered in the Philadelphia suburbs. In Bucks County, about 40 miles north of Philadelphia, the average deduction is $5,444; it’s only $2,866 in Butler County, about 30 miles north of Pittsburgh.
- Proponents of keeping the deduction argue that eliminating the deduction hurts those below $200,000. First, as noted above, that statistic is a bit misleading, as almost 90 percent of the deduction flows to those making more than $100,000, but even more important is that the underlying analysis does not include the impact of lowering marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s.
Below is an interactive map showing the mean deduction taken per tax return in each county. Click here for a larger version.
Repealing SALT is not happening in a vacuum. It is offsetting revenues needed to finance other tax cuts.Share