From the moment the Tax Cuts and Jobs Act (TCJA) was introduced, the Democratic line has been that it is a giveaway for the wealthy. Though this is not the case (90 percent of middle-class American families received a tax cut this year), it makes it even more unusual that a group of blue-state Democratic governors are banding together to protest TCJA’s elimination of a deduction that primarily benefits the wealthy.
New York Gov. Andrew Cuomo is leading a coalition of governors from Illinois, Hawaii, Connecticut, Rhode Island, New Jersey, Oregon and Washington to push for the elimination of the cap on the so-called “SALT” deduction (a provision which allows a taxpayer to deduct state and local taxes on their federal return).
New Jersey Gov. Phil Murphy claimed that the change “guts the middle class.” In reality, the SALT deduction is a provision that overwhelmingly benefits the wealthy. In tax year 2015, just 3.5 percent of the benefit of the SALT deduction went to taxpayers with incomes below $50,000 per year. On the other hand, over 84 percent of the benefit of the SALT deduction went toward taxpayers with incomes above $100,000 per year. Out of the 141.2 million taxpayers that filed that year, a wealthy slice comprising less than one-hundredth of one percent of total taxpayers nonetheless pocketed 11 percent of the benefits.
The Tax Cuts and Jobs Act capped the value of this deduction at $10,000, ensuring that most middle-class families would not be hit by the change. This protects taxpayers in lower-tax states from having to essentially subsidize the high-tax climates of states like California and New York.
On top of this, the changes to the SALT deduction did not happen in a vacuum. The deduction was eliminated to fuel other tax cuts. One such change raised the exemption for the dreaded Alternative Minimum Tax, shrinking it dramatically. This change alone means that nearly five million taxpayers will effectively see their SALT deduction cap rise from $0 to $10,000, since deducting state and local taxes was disallowed entirely under the previous AMT.
Of course, the crocodile tears about middle-class taxpayers mask the reason blue-state governors are upset about the changes to the SALT deduction — and at the same time, another reason why it was so important to institute a cap. They’re worried about the impact on their high-tax budgets.
In effect, the SALT deduction acts as a way for high-tax states to pass on some of the impact of their high taxes to the federal government. High state and local taxes are less painful to wealthy taxpayers when they can write them off when filing their federal taxes. This means that states are essentially encouraged by the federal government to tax at a higher rate than they otherwise would because they can spread that pain to other states. The kicker is that taxpayers in states that tax their residents responsibly end up paying for this deduction through their federal income taxes.
Now that wealthy taxpayers in high-tax states are being exposed to the full cost of their states’ tax policies, blue-state governors are trying to redirect their anger toward a federal government that has finally stopped subsidizing blue-state over-taxing. Instead of humoring them, taxpayers should encourage Cuomo and friends to learn their lesson and return their tax codes to more reasonable rates.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.