Don’t Believe False Reports That Say Eliminating the SALT Deduction Would Cost the Average Taxpayer Tens of Thousands of Dollars

COMMENTARY Taxes

Don’t Believe False Reports That Say Eliminating the SALT Deduction Would Cost the Average Taxpayer Tens of Thousands of Dollars

Oct 26, 2017 2 min read
COMMENTARY BY
Rachel Greszler

Senior Research Fellow, Roe Institute

Rachel researches and analyzes taxes, Social Security, disability insurance, and pensions to promote economic growth.
Conservative and liberal lawmakers alike should support eliminating the state and local tax deduction. iStock

Key Takeaways

Some politicians are determined to retain a special tax deduction that allows state and local governments to levy excessive taxes on their residents.

Millionaires in New York and California get even bigger tax breaks from the state and local tax deduction.

Eliminating the state & local tax deduction increases fairness and simplicity in the federal tax code and allows for up to an up to 16% reduction for all taxpayers.

Some politicians are determined to retain a special tax deduction that allows state and local governments to levy excessive taxes on their residents by shifting part of the burden to federal taxpayers in other states.

These politicians are claiming that their residents would pay thousands of dollars—even tens of thousands—more in federal taxes if Congress eliminates the state and local tax deduction as part of pro-growth tax reform.

But those figures are based on flawed analysis. Take this interactive graphic showing the “average deductions” and “total value of state and local tax deductions” across New Jersey’s counties. The corresponding article claims that eliminating the state and local tax deduction would “mean a loss of about $21,500 in write-offs for the average New Jersey taxpayer.”

That’s not true.

For starters, the data reported isn’t actually an average value for all taxpayers. It appears to include only those who actually claim the state and local tax deduction. But the percent that claim the state and local tax deduction can be as low as 5 percent for New Jersey taxpayers who make less than $10,000 a year, and as high as 98 percent for those making more than $200,000 per year.

The average state and local tax deduction among all New Jersey taxpayers — not just those who claim it — is actually about $7,350, based on the most recent 2015 IRS tax statistics (across the U.S., the average state and local tax deduction is $3,700). For most taxpayers, doubling the standard deduction and lowering marginal rates — as called for in both the president’s and Republicans’ tax reform plans — would make most taxpayers better off than they are with the state and local tax deduction.

Even if you include only the 41 percent of New Jersey taxpayers who actually claim the deduction, however, the average amount claimed is $17,850 — significantly lower than the reported figure of $21,500.

That’s not to say the deduction isn’t extremely valuable to certain taxpayers. The average millionaire in New Jersey deducts almost $290,000 in state and local taxes off his federal tax bill. At a top marginal rate of 39.6 percent, that’s a nearly $115,000 federal tax break.

Millionaires in New York and California get even bigger tax breaks from the state and local tax deduction. On average, millionaires in these two high-tax states deduct more than $450,000 in state and local taxes, leading to a federal tax break of more than $180,000.

But what about similarly-situated millionaires living in low-tax states such as Texas and Florida? Well, they deduct only about $75,000 in state and local taxes. As a result, millionaires living in Texas and Florida pay about $150,000 more in federal income taxes than those with identical incomes who live in California or New York.

That doesn’t seem fair, especially considering they all receive the exact same services from the federal government. Really, what’s happening is that the higher federal taxes paid by workers in low-tax states help fill the coffers of high-tax state and local governments, and help buffer the pocketbooks of wealthy individuals in those high-tax states.

So really, the debate about whether to eliminate the state and local tax deduction is not about preventing certain taxpayers from paying more. It’s about leveling the playing field so that taxpayers with identical incomes pay the same amount in federal taxes — and so that wealthy individuals don’t get a bigger federal tax break than low- and middle-income earners.

That’s why conservative and liberal lawmakers alike should support eliminating the state and local tax deduction. Not only would eliminating the state and local tax deduction increase fairness and simplicity in the federal tax code — it would allow for a significant rate reduction — of up to 16 percent — for all taxpayers.

This piece originally appeared in Save Jersey

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