Cutting SALT From the Federal Tax Diet: New at Reason

IRSIn the quest for a better tax code, it shouldn't be difficult to agree that a tax deduction that mostly benefits rich people and subsidizes high-tax state and local governments must go. That's what the state and local tax, or SALT, deduction does, and it was rightly slated for termination in the tax reform framework by the "Big Six," to the displeasure of some in Congress. Resistance from these lawmakers, however, is misplaced, because a repeal of SALT—alongside other reforms in the plan—would most likely leave the vast majority of taxpayers better off and our tax code much fairer and simpler.

The ability to deduct state and local taxes from one's federal tax bill goes as far back as the income tax itself. According to the most recent Trump administration budget, it is the sixth-largest individual income tax expenditure and represents a loss of revenue of $100 billion annually.

That's a lot of money, considering it benefits the less than 30 percent of taxpayers who choose to itemize deductions, and even then, it's only those who aren't limited by the alternative minimum tax. Some argue that SALT is an expression of our federalist tradition to give priority to localized spending or is a way to avoid the double taxation of state and local taxpayers' income, but these arguments are overwhelmed by the fact that the targeted benefits mostly favor higher-income earners in high-tax states and are highly distortive, writes Veronique de Rugy.

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