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User:Jaydavidmartin/State and local tax deduction

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The United States federal state and local tax (SALT) deduction is an itemized deduction that allows taxpayers to deduct certain taxes paid to state and local governments from their adjusted gross income. The Tax Cuts and Jobs Act of 2017 put a $10,000 cap on the SALT deduction for the years 2018–2026.[1]

The SALT deduction reduces the cost of state and local government taxes to taxpayers. It disproportionately benefits wealthy and high-earning taxpayers in areas with higher state and local taxes.[2][3][4] The Tax Policy Center estimated in 2016 that fully eliminating the SALT deduction would increase federal revenue by nearly $1.3 trillion over 10 years.[5]

Description edit

The SALT deduction enables taxpayers who itemize their deductions (rather than claim the standard deduction) to subtract certain state and local taxes from their taxable income. For United States Federal Income Tax purposes, state and local taxes are defined in section 170(a) of the Internal Revenue Code as taxes paid to states and localities in the forms of: (i) real property taxes; (ii) personal property taxes; (iii) income, war profits, and excess profits taxes; and (iv) general sales taxes. Taxpayers may not deduct both state income taxes and sales taxes—they must choose one or the other.

The Tax Cuts and Jobs Act of 2017 capped the use of this itemized deduction at $10,000 ($5,000 for married persons who file separately).[6]

Effects edit

The SALT deduction increases the ability of state and local governments to levy taxes by reducing the after-tax cost of state and local taxes to taxpayers.[7]

Tax savings from the SALT deduction flow disproportionately to those with high incomes.[8] According to the Joint Committee on Taxation, in 2014 88% of the benefit of the SALT deduction accrued to those with incomes in excess of $100,000 and only 1% accrued to those making less than $50,000.[9]

The SALT deduction primarily benefits those in high-tax states, which tend to be those with consistent Democratic legislative majorities. In 2016, the ten counties with the largest SALT deductions per filer (on average) were in New York, California, Connecticut and New Jersey.[10] These ten counties are in the New York metropolitan area and San Francisco Bay Area, which are known for having high concentrations of wealth and expensive real estate. Since the deduction was capped at $10,000 in 2017, many homeowners have been unable to deduct thousands of dollars that they previously could, beyond what they pay in property taxes, to state, county and local governments in these places.[11]

History edit

Precursor edit

A deduction on state and local taxes predates the establishment of the permanent federal income tax, instituted by the Revenue Act of 1913.[12] To help fund the Civil War effort, President Abraham Lincoln signed the Revenue Act of 1862, which established a temporary income tax.[13][14] The Revenue Act included a deduction for state and local taxes, as well as national taxes.[12][15]

This Civil War-era income tax was repealed in 1871. A federal income tax was again introduced in 1894, and again included deductions for state and local taxes.[14] However, in 1895 the income tax was ruled unconstitutional by the Supreme Court (see Pollock v. Farmers' Loan & Trust Co.).[16][17]

Creation: Revenue Act of 1913 edit

The first permanent income tax was established by the Revenue Act of 1913, following the ratification of the Sixteenth Amendment to the United States Constitution earlier that year. A deduction for state and local taxes, as well as for national taxes, was included in the Revenue Act.[a][12] The federal income tax has included a deduction for state and local taxes ever since.[15]

Various changes edit

During the Great Depression, states expanded the number of taxes they levied to make up for revenue shortfalls. This included an expansion in state income taxes (only 14 states and Hawaii had state income taxes before 1930, and were imposed primarily on very high incomes at low rates) and state sales taxes (by 1940, sales taxes made up about 60% of state budgets).[12] In response to the growing use of state sales taxes, in 1942 Congress made an explicit allowance for a deduction of state and local retail sales taxes.[12]

The introduction of the standard deduction in 1944 limited the scope of the state and local tax deduction, as well as all other itemized deductions (taxpayers who choose to use the standard deduction may not use itemized deductions).[15]

Congress has on a number of occasions restricted the types of state and local taxes that can be used with the SALT deduction. The Revenue Act of 1964 restricted the SALT deduction to state and local taxes on real property, personal property, income, general sales, and gasoline and other motor fuels.[12] In the midst of the 1970s energy crisis, Congress passed the Revenue Act of 1978, which eliminated the deduction for state and local taxes on gasoline and motor vehicle fuel.[12][15] The Tax Reform Act of 1986 disallowed sales taxes from being deducted, while the American Jobs Creation Act of 2004 gave taxpayers the option of deducting either state and local income taxes or state and local sales taxes.[15]

Tax Cuts and Jobs Act of 2017 edit

Main article: Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017, signed into law by President Donald Trump, capped the total SALT deduction at $10,000 for the tax years 2018 through 2025.[19] The increase in the standard deduction by the bill was also expected to reduce the number of taxpayers who claim the SALT deduction.[20]

In January 2018, the states of New York, New Jersey and Connecticut (whose wealthy residents benefit disproportionately from the SALT deduction) sued the federal government over the constitutionality of the SALT cap, arguing that it unfairly restricts their ability to pursue their own preferred tax policies.[21] In October 2019, a federal court dismissed the legal challenge.[22]

Build Back Better Act edit

Main article: Build Back Better Act

In July 2021, House Representative Tom Suozzi and Senate majority leader Chuck Schumer, both Democrats from New York, pushed legislation in the U.S. House of Representatives to repeal the deduction limit.[23] In April 2021, as the Build Back Better Act was being debated in the House, a bipartisan group of House lawmakers formed the "SALT caucus" to advocate for the repeal of the $10,000 limit on the state and local tax deduction.[24] They would later threaten to block the bill if a raise on the SALT deduction were not included.[25]

The version of the Build Back Better Act passed by the United States House of Representatives on November 19, 2021 would increase the SALT deduction cap to $80,000 until 2030, after which it would expire. Jared Golden was the only Democrat to vote against the act, because of his opposition to benefiting high-income taxpayers by raising the cap.[1]

Analysis by the Tax Policy Center concluded that more than 96% of the tax cut from raising the deduction cap to $80,000 would go to the highest-income 20% of households.[26]

Arguments in favor edit

Double taxation edit

Subsidy to states edit

Criticism edit

Primarily benefits high earners edit

Higher marginal tax rates edit

Subsidy for high-tax states edit

Critics of the deduction contend that it unfairly results in low-tax states and cities subsidizing high-tax states and cities.[27]

Notes edit

  1. ^ The various exemptions and deductions were in fact so generous that less than 1 percent of the population paid income taxes at the rate of only 1 percent of net income.[18]

References edit

  1. ^ a b Thanikachalam, Neya (November 29, 2021). "In Democrats' Build Back Better bill, increase in controversial limit on state and local tax deductions could help wealthier Mass. residents". The Boston Globe. Archived from the original on January 21, 2022.
  2. ^ Rappeport, Alan; McGeehan, Patrick (18 November 2021). "Tax Deduction That Benefits the Rich Divides Democrats Before Vote". The New York Times. Archived from the original on June 3, 2022. {{cite news}}: |archive-date= / |archive-url= timestamp mismatch; March 3, 2022 suggested (help)
  3. ^ Pulliam, Christopher; Reeves, Richard V. (September 4, 2020). "The SALT tax deduction is a handout to the rich. It should be eliminated not expanded". Brookings Institution. Archived from the original on November 10, 2021. Retrieved November 11, 2021.
  4. ^ Bellafiore, Robert (October 5, 2018). "Who Benefits from the State and Local Tax Deduction?". Tax Foundation. Archived from the original on October 8, 2021. Retrieved November 11, 2021.
  5. ^ Sammartino, Frank; Rueben, Kim (March 31, 2016). "Revisiting the State and Local Tax Deduction" (PDF). Tax Policy Center. Archived (PDF) from the original on November 6, 2021. Retrieved November 11, 2021.
  6. ^ "Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes" (PDF). Internal Revenue Service. 2020. Archived (PDF) from the original on January 26, 2022.
  7. ^ Driessen, Grant A.; Hughes, Joseph S. (March 6, 2020). "The SALT Cap: Overview and Analysis". Congressional Research Service. Archived from the original on March 27, 2022.
  8. ^ Walczak, Jared (March 2017). "The State and Local Tax Deduction: A Primer" (PDF). Tax Foundation. Archived (PDF) from the original on October 22, 2021. Retrieved March 27, 2022.
  9. ^ "Estimates of Federal Tax Expenditures for Fiscal Years 2015–2019". Joint Committee on Taxation. December 7, 2015. Archived from the original on August 12, 2021. Retrieved March 27, 2022.
  10. ^ Bellafiore, Robert (October 5, 2018). "The Benefits of the State and Local Tax Deduction by County". Tax Foundation. Archived from the original on January 23, 2022.
  11. ^ Picchi, Aimee (April 9, 2019). "Middle-class homeowners hit by the new tax law: "This is going to wipe us out"". CBS News. Archived from the original on November 30, 2021. Retrieved July 13, 2021.
  12. ^ a b c d e f g Surane, Julianne (2018). "Legislative History of the SALT Deduction" (PDF). American Bar Association. Archived (PDF) from the original on December 2, 2021. Retrieved March 27, 2022.
  13. ^ Hill, Joseph A. (July 1894). "The Civil War Income Tax". Quarterly Journal of Economics. 8 (4): 416–452. doi:10.2307/1885603 – via JSTOR.
  14. ^ a b Pollack, Sheldon D. (Winter 2014). "The First National Income Tax, 1861–1872" (PDF). The Tax Lawyer. 67 (2): 311–330.
  15. ^ a b c d e Hemel, Daniel J. (2019). "The Death and Life of the State and Local Tax Deduction". Tax Law Review. 72: 151–196 – via Social Science Research Network.
  16. ^ Jones, Francis R. (October 1895). "Pollock v. Farmers' Loan and Trust Company". Harvard Law Review. 9 (3): 198–211. doi:10.2307/1321669 – via JSTOR.
  17. ^ Bishop-Henchman, Joseph (April 8, 2013). "Today in History: Income Tax Ruled Unconstitutional in Pollock v. Farmers Loan Trust Co". Tax Foundation. Archived from the original on June 16, 2021. Retrieved March 27, 2022.
  18. ^ "16th Amendment to the U.S. Constitution: Federal Income Tax (1913)". National Archives and Records Administration. Archived from the original on March 13, 2022. Retrieved March 27, 2022.
  19. ^ "How did the TCJA change the standard deduction and itemized deductions?". Tax Policy Center. May 2020. Archived from the original on January 17, 2022. Retrieved March 27, 2022.
  20. ^ Driessen, Grant A.; Hughes, Joseph S. (March 6, 2020). "The SALT Cap: Overview and Analysis". Congressional Research Service. Archived from the original on January 8, 2022. Retrieved March 27, 2022.
  21. ^ Kelly, Stephanie (January 26, 2018). "New York, New Jersey, Connecticut to sue over federal tax law". Reuters. Archived from the original on November 6, 2021. Retrieved March 27, 2022.
  22. ^ "Federal Court Dismisses States' Challenge to SALT Deduction Cap". Thomson Reuters. October 1, 2019. Archived from the original on November 8, 2021. Retrieved March 27, 2022.
  23. ^ Chiappino, Leah (July 1, 2021). "Long Island Congressman Suozzi Wants End to SALT Cap as Part of Infrastructure Deal". WSHU. Archived from the original on January 4, 2022.
  24. ^ Jagoda, Naomi (April 15, 2021). "Lawmakers launch bipartisan caucus on SALT deduction". The Hill. Archived from the original on October 3, 2021. Retrieved March 27, 2022.
  25. ^ Dore, Kate (January 21, 2022). "'No SALT, no deal.' Some House Democrats say deduction must be in Build Back Better". CNBC. Archived from the original on March 14, 2022. Retrieved March 27, 2022.
  26. ^ Gleckman, Howard (September 24, 2018). "High-Income Households Would Benefit Most From Repeal of the SALT Deduction Cap". Tax Policy Center. Archived from the original on January 21, 2022. Retrieved March 27, 2022.
  27. ^ Coy, Peter (April 5, 2021). "The SALT Deduction Isn't Just a Subsidy to High-Tax Blue States". Bloomberg Businessweek. Archived from the original on November 20, 2021.
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