Surely you’ve heard that SALT is bad for you. Too much sodium, and you’ll get a heart attack and die. A very different kind of salt, aimed at tax policy is similarly toxic.
SALT stands for State and Local Tax deduction, and the premise behind it is that the money you pay to your municipality, and state is money that should be deducted from your federal taxes.
It may seem to go against my free-market priors that I’m in favor of government collecting more money, but it’s also true that policies like SALT end up encouraging more government spending in general, and ends up punishing states that are more fiscally responsible.
Here’s why. If you get to deduct 10,000 from your taxes right away based on the fact that you’re paying state and local taxes, there’s little incentive for you to question the need for these state and local taxes. After all, federal taxes are so much higher than state taxes, and state taxes are merely deductions, then as states it’s rational to spend significantly more, regardless of the benefit associated. This pushes the burden of federal spending onto more fiscally responsible states, because they receive less deductions because their rates are less to begin with. In turn, this incentivizes bigger state government, and higher statutory rates aimed at outrunning this deduction.
Instead, capping the SALT deduction, or completely eliminating it changes the dynamic entirely. In the same way you might be unwilling to pay for college without financial aid, you might be less willing to accept spendthrift state government. This in turn will push people towards more limited state governments as they try to keep their tax bill under control.
Interestingly, one strange bedfellow in favor of limiting SALT is the Brookings Institution. They point out that removing this cap will in effect be a pro-rich policy, since they would be the primary beneficiary of a higher SALT cap, or an uncapped approach.
Here are two criticisms of my broad perspective. First, progressive tax systems are good, and it’s worthwhile to reduce income inequality, both by increasing services and creating higher tax rates. Second, the shock towards people used to this deduction is unfair, and will push people away from working in areas like New York and San Fran, making them less productive.
If you care more about reducing the root factors of inequality than overall well-being, you might agree with the SALT deduction, or even want to increase it. However, I will point out that the psychic pleasure of seeing rich people eat less of the pie does little to fill our own bellies.
Isadore Johnson's Website 