Easy on the SALT — A New Paper on the Deduction for State and Local Taxes

I’ve just posted a new working paper on the deduction for state and local taxes (SALT) that offers a (qualified) defense of the status quo. The paper argues that the case for repealing the SALT deduction is especially weak in the context of the “Unified Framework” unveiled by the Trump administration and congressional Republicans last month. From the introduction:

— While the “broad base rule,” which recommends lower rates on a broader base to minimize the deadweight loss of taxation, is sometimes invoked as a reason for repealing the SALT deduction, the intuition underlying the broad base rule may actually weigh in the SALT deduction’s favor;

— Insofar as state and local tax taxes fund educational expenditures (the number one category of state and local government spending), full deductibility is appropriate under the consumption tax principles animating the Unified Framework;

— Insofar as state and local tax taxes fund health care expenditures (the number two category of state and local government spending), full deductibility is necessary to ensure equal treatment of employer-provided and subnational government-provided health care;

— Repealing the SALT deduction while retaining the charitable contribution deduction — which is what the Unified Framework proposes to do — would distort collective decisions regarding the financing of public goods;

— Repealing the deduction for nonbusiness state and local taxes while retaining the deduction for taxes paid by businesses — which is also what the Unified Framework apparently proposes — would introduce new distortions into the choice of revenue-raising instruments for state and local governments;

— Repealing the SALT deduction would potentially lead to an increase in state and local government borrowing unless Congress could credibly commit not to revive the deduction down the road;

— Notwithstanding the fact that the benefits of the SALT deduction accrue disproportionately to high-income households, repeal of the SALT deduction in the service of across-the-board rate cuts would potentially make the federal tax system less progressive in important respects; and

— While interstate equity is a dubious objective for federal tax policy in the first place, those who believe that the federal government should seek to allocate the burdens and benefits of federal taxing and spending evenly across states ought to support — not oppose — the SALT deduction on those grounds.

Comments, suggestions, and objections appreciated (via e-mail, tweet, or in the response section below).