In a rare change of pace, tax legislation passed out of the Ways and Means Committee last week with overwhelming, bipartisan support. In a more common turn of events, it may not get much further thanks to a small group of passionate, but misled lawmakers known as the “SALT Caucus.”
This coterie of 33 members hail from states with high income tax rates–California, Connecticut, Maryland, and Minnesota–where the Caucus’s stated mission is to “make life more affordable” for middle-class families.
That’s a laudable aim, but their method of achieving it is backward.
Instead of advocating for the reform of burdensome income taxes in their own states, SALT Caucus members are holding federal tax relief hostage just to undo a 2017 law that capped the amount of state and local taxes (SALT) mostly well-off taxpayers could deduct from their federal tax bills.
Leading up to 2017, many high-tax states could get away with keeping their taxes high in part because itemizing taxpayers could write off their state and local tax bills when filing with Uncle Sam. By placing a $10,000 cap on the SALT deduction, the tax code became more neutral. An autoworker in Michigan no longer had to foot the bill for a hedge fund manager in New Jersey to write off his state tax bill. Despite the SALT Caucus’ claims that the 2017 reforms raised taxes on their constituents, overall, the law reduced tax burdens for the vast majority of taxpayers–including many affected by the cap.
These were prudent changes. Yet the SALT Caucus continues to wage battle against congressional tax writers while seemingly ignoring what is occurring back home.
Tax hikes in many of these states continue to emerge. California recently raised its top marginal tax rate on wage income to 14.4%, the highest in the nation. Meanwhile, people are leaving the coasts for more tax-friendly jurisdictions. Data show states like New Jersey and Illinois are consistently in a net loss position for interstate migration decisions.
If members of the SALT Caucus are interested in providing tax relief to their constituents, they’d be better served lobbying state tax writers in Albany or Sacramento. Because if they look closer at state-level trends, they’d recognize their states are missing out on the ongoing revolution in state tax policy.
Many states are taking advantage of the revenue surpluses that emerged from the pandemic by lowering personal income tax rates for their workers. If your state tax bill gets reduced, the SALT cap immediately becomes less meaningful. Of the 43 states that tax income, 25 have adopted rate cuts since 2021. While many factors influence where a family decides to buy a home or where an entrepreneur opts to open a business, the evidence continues to show that taxes matter.
The SALT Caucus House members need to consider the trade-offs of their policy decisions. The bill from the Ways and Means Committee is not perfect, but Tax Foundation modeling finds the near-term effects would boost after-tax incomes for all taxpayers while remaining roughly revenue neutral. Meanwhile, eliminating the SALT cap would largely benefit only the top 20% of taxpayers while potentially adding $226 billion to the debt. Elected members should not be holding even imperfect tax legislation hostage over an issue that the federal tax code is not meant to fix.
The 2017 tax reform was also imperfect, but it brought tax relief to millions of Americans and has supported business investment and hiring across the country. The current bill would address some of those imperfections, but the real challenge for lawmakers will arrive next year when tax rates will go up for practically everyone if Congress fails to act.
The SALT Caucus and other special interest factions in Congress should avoid disrupting opportunities for meaningful, pro-growth changes to the tax code. A well-designed tax code requires lawmakers to think long-term and nationally, rather than parochially. Criticisms of this legislation should be aimed at finding ways to make its best components permanent. But if lawmakers acquiesce to the demands of the SALT Caucus and use the federal tax code to bail out bad state tax decisions, it will represent a failure of sound tax policy.
Daniel Bunn is president and CEO of the Tax Foundation, a nonpartisan research organization in Washington, D.C.
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