GOP Plans to Eliminate the State and Local Tax Deduction
The House and Senate GOP tax reform plans propose to restrict and eliminate the deduction for state and local taxes (SALT). This deduction has been in existence since 1913 and about 1/3rd of all taxpayers use this deduction. Its purpose is to avoid double taxation – i.e. you do not have to pay federal taxes on income you do not actually have because you paid it in taxes to the state or local government.
Repeal of SALT will hit the working middle class very hard. Forty percent of tax filers between $50,000 and $75,000 claim this deduction. Fifty-three percent of tax filers between $75,000 and $100,000 claim this deduction. Seventy-six percent of tax filers between $100,000 and $200,000 claim this deduction.
Elimination of the SALT deduction would cost taxpayers about $96 billion in 2017 and about $1.3 trillion over the next ten years. Elimination of SALT will hurt taxpayers the most in states like California, New York, New Jersey with high costs of living, high per capita incomes, high property taxes and high tax rates. These are also the states where state and local taxpayers make a huge net contribution to the federal government – i.e. their citizens pay more in taxes than their citizens receive in federal benefits. So this is a double whammy on those states that did not support Donald Trump in the 2016 election. Republican lawmakers in some of these states (particularly New York and New Jersey) are very concerned about the electoral blowback from suburban voters in 2018. California’s Republican Congresspersons do not seem yet to have heard and responded to the concerns of California’s voters about the elimination of the SALT deduction.
In California, it will adversely impact our state’s ability to pay for education and health care. In California, Proposition 13 cut local property taxes and restricted the ability of local governments to raise them to pay for public schools. California now relies very heavily on its progressive state income tax base to fund public education, K-12 higher education and the state match for health care programs.
Why are the GOP leaders proposing to eliminate this popular middle class deduction which helps pay for public education and health care? Because they are proposing massive tax cuts for corporations and the rich and they need to offset them somewhat by eliminating tax deductions for the middle class.
· Reducing corporate tax rate to 20% = $1.46 trillion
· Cost of phasing out and eliminating estate tax on the wealthy = $172 billion
· Repeal of alternative minimum tax for the wealthy = $695 billion
· 25% pass through rate for the wealthy who own their own businesses = $448 billion
· Four tax brackets = $1 trillion
· Increase the standard deduction = $930 billion
· Repeal itemized deductions = $1.5 trillion.
Three tidbits you also need to know. First the state and local tax exemption is still available for those wealthy individuals who own their own businesses as President Donald Trump does. Second under the alternative minimum tax (AMT), the cumulative deductions for the very well to do are somewhat negated; however both these proposals will repeal the AMT for individuals and corporations. Third the Senate version totally eliminates SALT while the House version eliminates it for state and local income taxes and caps it at $10,000 annually for local and state property taxes.
You really should let your representatives know about your concerns about repealing the SALT deduction.
Prepared by: Lucien Wulsin
Dated: 11/8/17