One of the more controversial aspects of the Tax Cuts and Jobs Act of 2017, 115–97, 131 Stat. 2054, was the limitation of the deduction for State and local taxes (sometimes called “SALT”) to $10,0000. Since the passage of the act, the Star-Ledger‘s website, NJ.com, has published quite a few “articles” criticizing that change and advocating for its repeal or evasion. Two such recent articles are Biden’s new infrastructure bill should also restore your property tax break, Pelosi says (posted April 1, 2021), and Murphy leads new effort by governors to restore your property tax break (first posted April 2, 2021).
It is not my purpose here to argue for or against the SALT deduction cap. What I want to do is discuss the argument set forth in many of the criticisms that the cap unfairly impacts New Jersey and other high-tax States which pay more in taxes than they get back in federal spending and was meant to punish New Jersey and those other States for being “blue,” more likely to support Democrats than Republicans. I will also comment on NJ.com’s failure to label these articles as opinion pieces.
From the beginning of the federal income tax and varying over time, a deduction has been allowed for taxes paid to State and local governments. Among the changes over time was the elimination of the deductibility of sales taxes in the Internal Revenue Code of 1986. (Subsequently the tax code was amended to allow a taxpayer to deduct either income taxes or sales taxes, but not both.) At least as applied recently, state and local taxes may only be deducted if the taxpayer itemizes deductions. A taxpayer who does not itemize can take the “standard” deduction, which is based on filing status.
Prior to the passage of the act, the deductibility of state and local taxes might well have encouraged states and localities to provide and finance services through general taxation because, it could be argued, the cost was partially subsidized by the federal government. For example, a municipality could provide (or contract for) garbage service for its homeowners because the local taxes were deductible where the cost of a private garbage hauler was not.
With the adoption of a SALT deduction cap of $10,000 (not much higher than the average property tax bill in New Jersey, to say nothing of State income tax), States and local governments where taxes exceeded the cap could expect to experience increased public pressure to reduce those taxes. Such governments opposed the cap when the bill was in Congress, challenged it in the courts, and have constantly sought its repeal. In February Forbes published an interesting piece discussing some of the repeal arguments.
Among the arguments published in NJ.com that the SALT deduction cap was unfair is the assertion that New Jersey pays more in federal taxes than it gets back. For example, in this article NJ.com cites a report from New York State Comptroller Thomas DiNapoli, which concluded that in the federal fiscal year 2018 (“FFY 2018”) New Jersey received only 79 cents from every dollar, fiftieth of the fifty states.
This is the argument I want to address.
First, its rests on the attribution of taxes paid by New Jersey residents as coming from the State itself rather than in large part by its residents.
Second, it assumes that there is some requirement of equivalency between taxes paid and federal spending within the State. Indeed, one element of the rhetoric contained in quotes from some members of Congress in these articles is calling the States which receive more in federal spending “moochers.” (Name-calling, especially by members of Congress, does not elevate public discourse, and is little different that President Trump’s rightly criticized use of Twitter to insult those with whom he disagreed.) If States that receive more in federal spending than their residents pay in federal taxes are “moocher states,” then are not New Jersey’s local government entities in the same position “moocher counties” and “moocher municipalities”? Indeed, why not measure the balance at the individual taxpayer level?
Lets look at some of the elements of the federal spending that go into this calculation. The New York State Comptroller’s report which NJ.com cites indicates that 62% of federal spending allocated to states in FFY 2018 consisted of direct payments to or on behalf of individuals. The two largest components of this category are social security and medicare, which together comprise 71% of these direct payments. If you add the next two biggest components, veterans benefits programs and federal employee retirement, the result is more than 84% of these direct payments (some 52% of all federal spending allocated to the states) are entirely based upon where the recipient chooses to live.
These NJ.com “articles” are advocacy pieces. Just look at their titles, describing the uncapped deduction as “your property tax break.” (It is of course not a property tax break at all, but a federal income tax break.) NJ.com of course has every right to express such opinions, but in response to feedback on its decision to erect a paywall to certain content, NJ.com also promised that it would “better label opinion pieces.”
As a final note, I must also point out that this issue puts NJ.com and high-tax state governors, who usually assert that those who have higher incomes do not pay their “fair share” of taxes, in the unusual position of defending a tax deduction that provides a greater benefit to higher-income taxpayers, as there is some correlation between income and state and local taxes paid, if only because those without sufficient income simply cannot pay high property taxes. The existence or level of a SALT deduction cap is irrelevant to a taxpayer whose itemized deductions, including an uncapped SALT deduction, do not exceed the standard deduction (increased to $12,000 for individuals and $24,000 for married couples by the same legislation).
Jay Bohn
April 5, 2021