The equity and efficiency of SALT cap repeal
By Scott Sumner
There’s currently some discussion in Washington DC about repealing the limitation on the deductibility of state and local taxes (from one’s federal taxes.) Back in 2018, the US government began limiting SALT deductions on federal income taxes to no more than $10,000/taxpayer. Repeal of this provision would have effects on both economic efficiency and economic equity:
Repeal would cause many more people to itemize their taxes, which would increase the time and money costs of preparing taxes. It would also drive a wedge between the local cost of state and local spending and the total cost. Thus 70% of the cost of a $1 billion government project in New York or California might be paid for by local taxpayers, while the other 30% would be paid for by taxpayers in all 50 states. This would push states toward projects that don’t pass cost/benefit analysis, but that might seem desirable if one ignores the external costs imposed on out-of-state residents. An example might be high-speed rail in California.
Repeal of the SALT limitation would reduce taxes on upper income taxpayers. Because there is no free lunch, other taxpayers would have to pick up the slack. If we run large budget deficits, then future taxpayers would absorb the bill.
PS. Because I live in California, I would pay less in taxes if SALT limits were repealed. However, my taxes would become much more complicated in terms of required record keeping, so I doubt I’d be any happier. Don’t just think in terms of “who pays”; a successful country is one that avoids lots of needless deadweight losses.