Senator Sanders came out very strongly today against a proposed reinstatement of the SALT deduction for five years, to be part of the proposed reconciliation package. He is right to oppose the SALT deduction. It is a provision that has no redeeming features. As a reminder, the SALT deduction allows taxpayers to deduct their state and local taxes from their taxable income. The 2017 Paul Ryan tax reform capped the deduction at $10,000 per taxpayer. Some Democrats in Congress now want to restore the full deduction for five years.
The reason the deduction has no redeeming features is that: 1) It is distortive: it implies a federal subsidy for state and local tax increases - voters don't pay the full cost of tax increases, so politicians face incentives to raise them beyond what would otherwise be the case. The distortion extends to the type of taxes that policymakers might adopt: the deduction encourages income taxes rather than sales taxes, i.e. it encourages taxes that distort work and innovation incentives, to the detriment of taxes that encourage thrift and capital accumulation (as is the case with consumption taxes). 2) It is regressive. Those who benefit the most from the SALT deduction are taxpayers who own a lot of property (local taxes) or who earn a lot of income (state income taxes). Essentially, under the SALT deduction, the poor have to pay more taxes to finance a tax cut for rich people. Indeed, according to the bipartisan Committee for a Responsible Federal Budget, about 80% of the tax cut would go to the top 5% of taxpayers. It would also be the biggest line item in the Build Back Better plan.
The proposal to restore the SALT deduction is symptomatic of the newfound tendency of center-left parties in advanced industrial democracies to cater to moneyed interests. This tendency was recently documented in admirable detail by Thomas Piketty and his coauthors. The populist right understands this and has made huge inroads with the working class.
Not only should Congress not restore the full deduction, they should also reduce or eliminate the partial deduction that now exists. While they are at it, they should also completely get rid of the mortgage interest deduction, which is similarly distortive and regressive.
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