Congress most likely is doing away with the SALT deduction, also known as the State and Local Tax deduction, which upper middle class and wealthy filers who itemize their taxes take advantage of to reduce their total tax liability to the federal government. Doing away with the SALT deduction in words of many state politicians is a “direct affront to middle class taxpayers”. But it’s not that simple.
First off, the SALT deduction only applies to a fairly narrow class of people to who pay income tax. To recieve the SALT deduction, you have to intemize your taxes. Many middle class families and most working class families do not intemize their taxes. If you don’t itemize taxes, you don’t currently recieve any benefit from the SALT deduction. Indeed, you would come out ahead under Congress’ plan to increase the standard deduction.
At the same time, the SALT deduction is limited by the Alternative Minimum Tax (AMT). If you are upper middle class or wealthy and make enough to be subject to the AMT, you are subject to AMT and can not take the SALT deduction. Indeed, at one time — prior to 1982 tax reforms — you could deduct SALT from AMT. But that hasn’t been the case in 35 years. The SALT deduction is great, but relatively few people actually get it — working people, the lower middle class, the upper reaches of middle class and wealthy generally don’t get to use it because they either don’t itemize their taxes or they have to pay the Alternative Minimum Tax.
Why do state politicians care about the SALT deduction so much — and regularly call it an attack on the middle class? Politics, plain and simple. If the SALT deduction goes away, the most frequent to turn out and vocal voters — upper middle class voters who own nice houses in the suburbs — will be hit the hardest with higher federal tax bills. While these families probably have enough fat in their budget to sustain paying a little extra in their federal tax bills, it will be an extremely unpleasant experience for these prime voters, who often are very politically involved. They might take out their rage on incumbents, both by contributing less and by voting for challengers. Many in the upper middle class have expensive homes, schools, and automobiles to pay for. Paying for increased taxes will hurt their budgets hard. As such, the prime voters are likely to demand that their state taxes be cut to make up for the increase in federal taxes. Indeed, that’s not an unreasonable proposition, but recongize revenue must come from somewhere — probably taxes on the wealthy.
Assuming that the SALT deduction goes away and the standard deduction expands as an alternative, a lot of lower middle class families will benefit greatly, especially those who rent rather then own. But to make up for the higher taxes on the politically involved upper middle class, we should look at taxing the truly rich even more. People say if you tax very rich people more, they will leave the state. But that hasn’t happened that much in the past, in part because New York State is already an mecca — the cultural and financial metropolis of the world — and most wealthy people live here despite the taxes. Charles Koch, if he was truly concerned about his personal tax bill, would have long left New York. Nothing holds him here except his desire to be the world’s greatest city. New York could certainly make our tax system more progressive, so the rich and upper middle class pay their fair share — when so many at lower end have so little.
I am not that worried about the SALT deduction going away. I’m actually kind of glad that my personal taxes will be going down with the standard deduction and that there will be less pressure to itemize my taxes, especially when I own a home. I’d rather have simplier taxes to file, and I’d rather working people have it easy as possible to get maximum tax relief they deserve. I don’t like Trump’s plan to give the rich a big fat tax break, but doing away with the subsidy to big state and local spending for the upper middle class will ultimately be good for our state and our country.