Because so few lower-income taxpayers itemize deductions, some 96 percent of the SALT benefit flows to the top 20 percent of households. The deduction becomes more valuable as your tax rate climbs, so more than half the benefit accrues to the top 1 percent. Fully a quarter benefits people in the top 0.1 percent of household incomes.
With rare exceptions, if you are worried that you can’t deduct your state and local taxes, you don’t just live in a high-tax state; you make a whole lot of money.
Nonetheless, when a 2017 tax law capped this deduction at $10,000, Democrats began agitating almost immediately to repeal the cap. President Biden was barely inaugurated when they started pushing once again to include it in the latest relief bill: With all the suffering in the land, won’t someone think of the rich?
That’s not quite how they put it, of course. The words “race to the bottom” get thrown around a lot, the implication being that since state and local taxes mostly go to the needy, removing the subsidy will drive affluent Americans to lower-tax states, in effect defunding the folks who need help the most.
Yet if you look at the tax burden in each state, the relationship between tax collection and service quality isn’t so clear. Are the poor in high-tax District of Columbia a third better cared-for than those in neighboring Maryland? How does middle-of-the-road Massachusetts manage to provide such excellent services while taking less than 10 percent of its citizens’ personal income, while New York state requires nearly 14 percent? Or are we subsidizing inefficient government, like New York’s highest-in-the-world transit construction costs?
Other funds get spent on things that mostly benefit locals, like streets and sidewalks. It would be hard to argue people in other states should pay for those things, even if they didn’t largely live in places with lower incomes than New York, New Jersey or California.
At this point, SALT’s boosters often retort that blue states subsidize red states, so SALT deductions just readjust the balance a little. Alas, this legend isn’t exactly true: There are red states among the net donors to the treasury, and many blue states are among the most subsidized. Moreover, those imbalances are largely a product of things most of SALT’s boosters support, such as federal employment, and progressive transfer programs such as Social Security. Given that most of SALT’s cheerleaders also support making the overall system even more progressive, it’s odd to see them suddenly arguing for giving special tax breaks to the rich.
But Democratic leaders must pander to a special group of voters: rich people who don’t feel very rich. Probably, if you are reading this article, you are one of them. I am, too. We tend to sincerely believe two things: Rich people should pay more taxes, and we ourselves need more tax breaks because we’re barely getting by.
Sure, we may make a comfortable income, but we had to borrow every last penny the bank would authorize just to get the ugliest house in a good school district. Many of us end up living paycheck to paycheck when property taxes or tuition bills come due, and our vacations never involve words like “luxury villa” or “private jet." How can we be rich, no matter what the household income charts say?
Yet the harder truth is that we really are spending our large incomes on luxuries, in the sense that very few people can enjoy the things we are paying for: close access to a dynamic urban economy with deep labor markets, lots of cultural amenities and, most importantly, near-guaranteed access for our kids to an elite college education, and the kinds of elite jobs that require those degrees. We tend to think of those things as bare necessities, but most Americans do without them.
We also forget that we chose to pay those inflated costs, because access to what those cities offer is valuable and what we want. We should be grateful we can afford it, instead of looking enviously at people living somewhere else.
Or if we’re really struggling, we could press the governments we elect to cut down on the absurd featherbedding built into roads, bridges and transit projects and the restrictive building codes that make new housing so expensive, and other excesses. That would certainly be more defensible than trying to revive the SALT deduction so people who made different choices can subsidize the high cost of enjoying our privileges.