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The State and Local Tax Deduction and Fiscal Federalism

Posted on Sep. 28, 2020
Alex Zhang
Alex Zhang

Alex Zhang is a JD candidate at Yale Law School and received his PhD from Yale University in 2018.

Zhang thanks professor Michael Graetz of Yale and Columbia Law Schools for his insightful feedback and wise guidance, as well as professor Anne Alstott of Yale Law School for her mentorship and a helpful conversation about fiscal federalism.

In this article, Zhang argues that the Tax Cuts and Jobs Act’s limit on the state and local tax deduction undermined the deduction’s effectiveness, thus underscoring the inherent defects and obstacles in advancing federalism with a tax measure.

This article was entered into Tax Analysts’ annual student writing contest and received the 2020 Christopher E. Bergin Award for Excellence in Writing.

Copyright 2020 Alex Zhang.
All rights reserved.

I. Introduction

Enacted in a highly polarized political environment, the Tax Cuts and Jobs Act1 is a major revision to the U.S. tax code.2 Among other things, the TCJA lowered the corporate income tax rate to 21 percent;3 overhauled the international tax rules by imposing, for example, a 10.5 percent tax on global intangible low-taxed income;4 and moved the U.S. tax system toward consumption taxation by means of immediate expensing for some and accelerated depreciation for others.5 Political responses to the enactment of the TCJA frequently fell on the extremes. In the House, while then-Minority Leader Nancy Pelosi, D-Calif., described the tax bill as “simply theft — monumental, brazen theft from the American middle class and from every person who aspires to reach it,” then-Speaker Paul Ryan characterized the bill as “giving the people of this country their money back.”6 In the Senate, the tax bill passed with a 51-48 vote, with no Democrat supporting it and no Republican voting against it.7

Among the TCJA’s many reforms, perhaps none was more controversial and polarizing than limiting the state and local tax deduction to $10,000.8 Because higher-tax jurisdictions, whose residents take more SALT deductions, tend to be more liberal-leaning, limiting the SALT deduction to $10,000 was widely seen as the Republican Party’s rebuke to Democratic states and voters. In the House, the TCJA passed with no Democratic support but with the defection of 12 Republican representatives, 11 of whom were from New York, New Jersey, and California, whose constituents might see their tax bills rise despite a federal tax cut.9 From the Republican perspective, the House Ways and Means report identified two main justifications for limiting SALT deductions: “scaling back existing tax incentives, including the deduction for State and local taxes, makes the system simpler and fairer for all families and individuals, and allows for lower tax rates.”10 The committee’s stated twofold aim — (horizontal) equity and enabling a regime of lower federal tax rates — mirrors the recommendations articulated by various conservative think tanks immediately before the TCJA’s enactment. The Heritage Foundation, for example, criticized the distributional impact of the SALT deduction and argued that it “resulted in federal taxpayers in low-tax, low-debt states subsidizing taxpayers in high-tax, high-debt states.”11 Eliminating the deduction would then “end the subsidy for bad state economic policies . . . and allow for a revenue-neutral and distribution-neutral reduction of up to 16.4 percent in federal tax rates.”12 Democrats, on the other hand, denounced the limit on SALT deductions as a “deliberate attack on those ‘states that overwhelmingly voted against Donald Trump.’”13 Media outlets noted that the states most affected by the limit — the ones with the highest average SALT deductions per household — voted for Hillary Clinton in 2016 with high margins.14 New York Gov. Andrew Cuomo (D), for example, vehemently criticized the TCJA’s limit on SALT deductions as an “economic missile” directed at his state, “an attempt to hurt Democratic states,” and “totally repugnant and hypocritical of the fundamental conservative ideology which [Republicans] preach — the limited federal government, respect [sic] state rights.”15 After the bill passed in the Senate, Minority Leader Charles E. Schumer, D-N.Y., vowed that the 2017 tax legislation “will be an anchor around the ankles of every Republican.”16

Even after the dust settled, high-tax states — particularly those on the East Coast — continued the fight against the limit on SALT deductions in extraordinary ways. In July 2018 Connecticut, Maryland, New Jersey, and New York filed a lawsuit in federal court, arguing that the limit on SALT deductions violated the 10th Amendment and exceeded Congress’s taxing power.17 In addition to litigation, high-tax states attempted practical workarounds of the TCJA limit. New York, for example, considered allowing taxpayers to transfer to state-government-controlled entities funds that would be fully deductible as charitable contributions. The state would then grant a credit equal to the transferred amount to offset the taxpayer’s state tax liability.18 Beyond the charitable contribution workaround, New York also tried to circumvent the TCJA limit by converting the income tax into a payroll tax that employers can deduct from their employees’ federal tax bill.19

As of today, neither litigation nor the practical workarounds have succeeded.20 In 2018 the IRS promulgated a notice informing taxpayers that it would invoke the substance-over-form doctrine and decline to characterize the transferred funds as charitable contributions.21 In 2019 a federal district court granted the federal government’s motion to dismiss the four states’ constitutional challenge to the TCJA cap on SALT deductions.22 In dismissing the lawsuit, the court acknowledged that the cap is “in some ways unprecedented” and that an uncapped deduction for state income and property (albeit not sales) taxes has been “a mainstay of the federal income tax since that tax’s earliest inception.”23 Nevertheless, the court held that the TCJA cap does not violate the 10th Amendment, since the states “remain free to exercise their tax power however they wish,” and the lone fact that a piece of legislation “affects the decisional landscape within which states must choose how to exercise their own sovereign authority” does not “render[] the law an unconstitutional infringement of state power.”24 Regarding the states’ argument that the TCJA cap coerces the states into changing their tax policies to align with the federal government’s preferences, the court noted that Article I of the Constitution25 “permits Congress to enact a tax that does not ‘fall[] equally or proportionately on each State,’ as long as the tax ‘operates with the same force and effect in every place.’”26 In response to the court’s decision, Cuomo declared that the state would consider appealing, as “this policy is unprecedented, unlawful, punitive and politically motivated — and it must be stopped.”27 The legal challenge, however, is unlikely to succeed. After all, Congress has limited SALT deductions in the past by the (admittedly less explicit) means of the alternative minimum tax,28 and it is unclear how the TCJA cap is different in a constitutionally relevant way.29

Thus, much of the recent debate on SALT deductions has focused on the political nature of the TCJA cap, with liberal-leaning (often high-tax) states denouncing it as an unfair attack and conservative-leaning (often low-tax) states characterizing it as a reform for the sake of equity and lower marginal tax rates. Given the polarized political environment, this is perhaps unsurprising. But missing from this debate is the (critical) function that SALT deductions have so far fulfilled in our constitutional system of federalism.30 All the way from the founding era, a central tenet of federalism posits that state and local governments must maintain their ability to tax (and therefore to spend, in accordance with the preferences and priorities of the local communities).31 An intense object of debate leading up to the ratification of the Constitution concerned the broad taxing power granted to the federal government under Article I, and more precisely, whether state and local governments could continue to raise revenue after the federal government chose to exercise its taxing power.32 The Revenue Act of 186233 — the first federal personal income tax, enacted at the height of the Civil War — allowed deductions for state and local taxes out of a desire to preserve taxable resources for state governments.34 The last time Congress (together with the Reagan administration) seriously considered eliminating the SALT deduction was during the 1986 tax reform.35 Despite political pressure and substantial academic commentary,36 the 1986 Tax Reform Act kept intact the deduction for state and local income and property taxes and repealed only the deduction for state sales taxes.37 This decision was at least partially motivated by the recognition that fully eliminating the SALT deduction would impair state and local government’s ability to raise revenue and provide services.38

Today, perhaps even more so than earlier, maintaining a system of federalism requires preserving state and local governments’ ability to tax and spend — the power to tax, after all, is an important (some might argue, necessary) component of sovereignty. The federal government spends more than $3 trillion in the states every year39 — more than the total expenditures of all states and localities combined40 — and the distribution of federal expenditures is highly uneven among states and localities.41 Delaware, for example, can expect to receive only 68 cents of federal spending for each $1 it pays into the federal treasury, while New Mexico or West Virginia can expect $3.52 of federal spending for each $1.42 The continued existence of federalism, under which each state or locality can provide services and effectuate policy in accordance with local preferences, requires mitigating this vast imbalance in federal expenditures.

This article examines the SALT deduction as a mechanism of fiscal federalism by analyzing the effect of the deduction, calculated as tax expenditures by state, on the imbalance of federal expenditures. I take seriously the idea that the SALT deduction constitutes a form of federal subsidy to the states, and a subsidy that naturally benefits states that impose heavier tax burdens on their residents.43 At the same time, the imbalance of federal expenditures generally (although not perfectly) leans in favor of low-tax jurisdictions, which benefit less from the subsidy of SALT deduction but more from federal spending in general. This article argues that, on the whole, the SALT deduction was an effective, albeit imperfect, means of mitigating the imbalance of federal expenditures before the 2017 tax legislation. The TCJA’s limit on the SALT deduction vastly undermined this effectiveness, while underscoring the inherent defects and obstacles in advancing federalism with a tax measure.

To this end, Section II of this article briefly reviews and situates it within previous scholarship. Section III presents the data and analysis for the imbalance of federal expenditures and the estimated effect of the SALT deduction, before and after the 2017 tax legislation, on this imbalance. The last section concludes and briefly discusses some of the shortcomings in effectuating federalism with the SALT deduction.

II. Literature Review

This part situates this article’s main arguments within two strands of previous scholarship: the deductibility of SALT and the broader relationship between taxation and federalism.

First, much has been written about whether state and local taxes should in fact be deductible in the federal income tax regime. Opponents of deductibility have made a wide range of theoretical and practical arguments44: The most prominent one relies on the Haig-Simons intuition that an income tax system should include in its base both consumption and savings — since state and local taxes are generally collected to provide benefits to the resident taxpayers, they should not be deductible like any other items of ordinary consumption.45 In other words, the merely mechanical fact that state and local governments function as intermediate providers does not render the distributed benefits a deductible expense — fire stations or public education are services that taxpayers cannot deduct (if they have to pay for them). Deductibility, by reducing the costs of providing local services, might indeed encourage overprovision of purely local services that do not have positive spillover effects.46 Progressivity of the federal income tax rates also implies that the SALT deduction is an upside-down subsidy that favors higher-income households — the AMT mitigates, but does not fully eliminate, this regressivity.47 Opponents of the SALT deduction also argue that it engenders inequities in the federal income tax: Lower-tax jurisdictions, in effect, subsidize higher-tax jurisdictions, leading to an uneven distribution in the provision of local services. Further, the deduction results in the federal government’s imposition of much higher tax rates in order to collect the same amount of revenue.48

Scholars favoring SALT deductibility have put forth an equally wide range of arguments. The earlier approaches focus on horizontal equity — if taxpayers in two different jurisdictions receive the same pretax income but must pay differing amounts of state and local taxes, then it seems inequitable to subject them to the same federal tax liability.49 The equity-based argument for deductibility has also found some support in recent behavioral-law-and-economics scholarship: Taking into account both the imperfect rationality of taxpayers and federalism concerns, professor Brian Galle argues, on equity grounds, that at least some state and local taxes should be deductible (for example, when state benefits and burdens are not correlated because of taxpayers’ cognitive biases).50 In response to the arguments regarding the regressivity of the SALT deduction, scholars have noted the progressive nature of state and local tax itself, which generally imposes higher marginal tax rates on higher brackets of income — indeed, the very regressivity of the SALT deduction may encourage progressivity in state and local taxation, because those jurisdictions can impose higher tax rates on high earners, who receive federal subsidies in the form of deductions.51 (For the sake of clarity, it is important to note that SALT deductions may function as two forms of subsidies: First, the state and local governments receive a federal subsidy that finances state and local taxation — the thought is that state and local governments can extract $100 of tax revenue that costs, for example, only $80 to the local taxpayers;52 and second, assuming that taxpayers receive some benefits from state and local expenditures that are roughly proportional to their state and local tax burdens, the taxpayers receive a federal subsidy that finances their “purchase” of public goods — for example, fire services and public education.53) More recently, scholars have advanced more qualified defenses of deductibility. Some have disaggregated the SALT deduction, contending that state taxes should be deductible while local taxes should not.54 Others have suggested that the SALT deduction be allowed at least insofar as the revenues fund educational and healthcare expenditures, and to the extent that allowing a charitable contribution deduction while repealing the SALT deduction would distort the collective financing of public goods.55

Second, various scholars have recently challenged the idea that state and local taxation (in its current form) contributes positively to our constitutional system of federalism. According to conventional wisdom, state and local taxation creates risks for discrimination against interstate commerce and export of tax burden to out-of-state residents. But these risks are mitigated by a variety of factors, including that (1) state and local governments tend to be more responsive to voters, so preserving their ability to tax increases democratic accountability in a tax regime;56 (2) market forces and benefits of reciprocity impede tax exporting;57 and (3) taxpayers can always leave if they are unsatisfied with their state and local taxes.58 In an influential article, professor Daniel Shaviro argues that these traditional assumptions are inaccurate, and that states’ taxing authority should be confined to “the determination of tax rates, not the precise contours of the tax bases to which they apply these rates.”59 While Shaviro emphasizes that he does not wholly reject federalism in taxation, he says the balance is askew — states and localities now have more control over taxation than efficiency would allow, because the costs of tax decentralization exceed the benefits.60 More recent scholarship has focused on “vertical externalities,” which take place when state and local tax policies “inflict costs on the federal government, at the expense of national welfare.”61 Such “tax cannibalization,” to which the SALT deduction contributes, gives “the federal government [] a large and direct stake in state government tax policy decisions.”62

This article fits into previous scholarship in two ways. First, by showing that the SALT deduction, calculated as tax expenditures by state, ameliorates the imbalance of federal expenditures, the article supplies an additional rationale for SALT deductibility. As philosophers have pointed out, justice in taxation cannot be separated from justice in expenditure.63 Previous scholarship has focused on the SALT deduction purely as a tax measure, without considering how it relates to (and pales in comparison to) the vast imbalance in federal expenditures. Second, by showing that the SALT deduction only imperfectly makes up for this imbalance — and that the TCJA has exacerbated this imperfection — the article suggests that there are inherent limits to using a tax measure to effectuate federalism.

III. SALT Deduction and the Imbalance of Federal Expenditures

This part is divided into three sections. Section A presents the data for federal expenditures for fiscal 2017, which shows a highly uneven distribution across states, especially when we consider each state’s contribution to federal tax revenue. Section B presents the data and analysis for the SALT deduction’s effectiveness in mitigating this uneven distribution before the TCJA’s limit. Section C examines the TCJA’s impact.

A. The Uneven Distribution of Federal Spending

Table 1 illustrates the imbalance of federal expenditures across states in fiscal 2017. As indicated in the table, column A shows the federal tax revenues by state, including business income, individual income, employment, estate, gift, and excise taxes (though individual income taxes constitute the vast majority of the federal tax revenues for most states).64 Column B shows the federal government’s spending in the states, including direct payments for individuals (for example, through the Social Security or Medicare programs), federal grants for state and local governments, federal procurement contracts, and wages for federal workers.65 Column C shows the per capita federal expenditure by state.66 Column D shows the overall balance of federal tax revenue and federal expenditure, while column E shows the per capita balance. Column F, lastly, shows the ratio of federal expenditure to revenue by state. Amounts in columns A, B, and D are in millions of dollars.

As Table 1 demonstrates, the distribution of federal expenditures is highly uneven among the states, especially when we consider the federal tax revenue that comes from each state. First, even if we look only at federal spending and remove Virginia and Maryland from consideration (since these two states — home to many federal agencies — receive an abnormally large amount of federal funds), per capita federal expenditures still range from $7,701 to $17,554. This implies that Alaska is receiving 2.28 times as much in federal expenditures per capita as Utah, and that outlier states can expect to receive approximately 50 percent more in federal spending than median states.

Second, when we take into account each state’s contribution to federal tax revenue, framing the uneven distribution as an imbalance between what the state contributes to the federal treasury (column A) and what the state receives from federal spending (column B), the results are even more striking. While 37 states receive surpluses (that is, they receive more federal money than they generate), 13 states suffer from deficits (that is, they receive less federal money than they generate). Many of the surpluses and deficits are substantial: On a per capita basis, 13 states can expect to receive over $5,000 more in federal expenditures than they put into the federal treasury, while four states must put $5,000 more into the federal treasury than they receive in federal expenditures. Three of these four states — Connecticut, Massachusetts, and New Jersey — are traditionally regarded as high-tax jurisdictions and take some of the highest per capita SALT deductions. These states can expect to get about 70 cents back from the federal government for each $1 they put in. In contrast, 11 states can expect to get $2 or more back from the federal government for each $1 they put in.67

Table 1. Distribution of Federal Revenues in FY 2017

State

A

Federal Tax Revenue

B

Federal Expenditures

C

Per Capita Expenditure

D

Balance of Federal Payments

E

Per Capita Balance

F

Ratio of Expenditure to Revenue

Alabama

26,584

65,751

13,487

39,167

8,034

2.473

Alaska

5,400

12,986

17,554

7,586

10,254

2.405

Arizona

43,928

82,812

11,748

38,884

5,516

1.885

Arkansas

32,458

35,129

11,698

2,671

889

1.082

California

440,475

436,092

11,069

-4,383

-111

0.990

Colorado

56,742

57,458

10,231

716

127

1.013

Connecticut

57,540

41,129

11,508

-16,411

-4,592

0.715

Delaware

17,081

11,546

12,064

-5,535

-5,784

0.676

Florida

192,869

237,654

11,329

44,785

2,135

1.232

Georgia

94,277

104,541

10,039

10,264

986

1.109

Hawaii

9,415

19,929

13,993

10,514

7,382

2.117

Idaho

10,386

17,451

10,152

7,065

4,110

1.680

Illinois

162,326

131,755

10,304

-30,571

-2,391

0.812

Indiana

58,941

67,780

10,177

8,839

1,327

1.150

Iowa

24,642

29,919

9,517

5,277

1,679

1.214

Kansas

25,563

31,297

10,752

5,734

1,970

1.224

Kentucky

35,127

70,808

15,898

35,681

8,011

2.016

Louisiana

42,725

52,011

11,135

9,286

1,988

1.217

Maine

8,083

17,438

13,062

9,355

7,007

2.157

Maryland

71,247

105,055

17,437

33,808

5,611

1.475

Massachusetts

112,996

78,730

11,471

-34,266

-4,993

0.697

Michigan

82,676

108,359

10,861

25,683

2,574

1.311

Minnesota

104,430

64,402

11,566

-40,028

-7,189

0.617

Mississippi

11,741

37,755

12,629

26,014

8,701

3.216

Missouri

71,921

72,271

11,831

350

57

1.005

Montana

6,080

12,233

11,616

6,153

5,842

2.012

Nebraska

25,450

17,736

9,249

-7,714

-4,023

0.697

Nevada

21,571

28,671

9,646

7,100

2,389

1.329

New Hampshire

12,138

14,993

11,108

2,855

2,115

1.235

New Jersey

143,835

97,682

10,990

-46,153

-5,192

0.679

New Mexico

8,979

31,669

15,128

22,690

10,839

3.527

New York

268,354

220,622

11,262

-47,732

-2,436

0.822

North Carolina

82,856

113,081

11,010

30,225

2,943

1.365

North Dakota

6,640

7,889

10,447

1,249

1,654

1.188

Ohio

142,086

125,689

10,776

-16,397

-1,406

0.885

Oklahoma

27,113

45,057

11,457

17,944

4,563

1.662

Oregon

32,346

45,676

11,015

13,330

3,215

1.412

Pennsylvania

139,797

155,850

12,185

16,053

1,255

1.115

Rhode Island

14,917

12,593

11,920

-2,324

-2,200

0.844

South Carolina

26,636

59,740

11,898

33,104

6,593

2.243

South Dakota

7,873

9,250

10,592

1,377

1,577

1.175

Tennessee

69,069

76,278

11,370

7,209

1,075

1.104

Texas

270,955

268,985

9,497

-1,970

-70

0.993

Utah

22,486

23,896

7,701

1,410

454

1.063

Vermont

4,423

7,976

12,771

3,553

5,689

1.803

Virginia

87,184

176,785

20,884

89,601

10,585

2.028

Washington

85,876

80,524

10,844

-5,352

-721

0.938

West Virginia

6,980

24,554

13,513

17,574

9,671

3.518

Wisconsin

53,089

55,411

9,567

2,322

401

1.044

Wyoming

4,394

7,121

12,300

2,727

4,711

1.621

Many other high-tax states, including Illinois and New York, also have large deficits, both total and per capita. California, on the other hand, is somewhat of an outlier: While traditionally regarded a high-tax state, its federal tax revenue roughly equals federal expenditures, resulting in a rough balance of federal payments. But it is also important to note that the federal government runs a substantial deficit, reaching $666 billion in fiscal 2017.68 This high federal deficit implies that the average state should receive a significant surplus in its balance of federal payments rather than receive neither a surplus nor a deficit. In fiscal 2017 the federal government received approximately $3.37 trillion in tax revenue from the states and spent approximately $3.71 trillion in expenditures in the states.69 This means that the average state should run a ratio of expenditure to revenue of 1.1 instead of 1, and that the average person in the 50 states should receive a (per capita) balance of federal payments of $1,044 instead of $0. As a result, California’s (and any other deficit state’s) balance of federal payments is in fact a larger deficit than Table 1 alone would seem to suggest.

Many states have protested this enormous imbalance in federal payments. New York, for example, has declared that although many states benefit from positive balances with the federal government, it “remains the single largest net contributor to the federal government of all states.”70 Since New York taxpayers “remain an outsized supporter of federal spending programs,” Congress should consider mitigating this imbalance of federal payments.71 This enormous imbalance — with Connecticut taxpayers receiving 72 cents back for each dollar they put in, and South Carolina taxpayers receiving $2.24 back for each dollar they put in — is unlikely to be sustainable. In the long run, the imbalance will likely result in consistent and severe underfunding of local services and public goods in deficit states, though, as the next section argues, the SALT deduction mitigated this impact until at least 2017.

Figure 1 illustrates the total balance of federal payments among the states: Red represents deficit whereas green represents surplus, and the darker the color, the larger the magnitude of the deficit or surplus.

B. SALT Deduction as Tax Expenditure

This section presents the data and analysis of the federal government’s SALT deduction tax expenditures by state. A methodological note first: The Congressional Budget Act defines tax expenditures as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”72 I calculate the SALT tax expenditure from data collected by the IRS Statistics of Income division, which provides state-by-state data, broken up by adjusted gross income levels, on state income tax, sales tax, real estate tax, and personal property tax deductions.73 I use the Urban-Brookings Tax Policy Center’s data on the distribution of taxpayers by marginal tax rates74 to estimate the average marginal tax rates for each AGI level, and then estimate the SALT deduction tax expenditure for each state by adding up the forgone revenue (SALT deductions * estimated average marginal tax rate) from each AGI group for each state. I also take into account the effect of the AMT, under which specific taxpayers would not be able to deduct state and local taxes, in calculating the SALT deduction tax expenditures for high-income households.75 In estimating the effect of the AMT, I use the data provided by the Tax Policy Center, which reports the percentage of filers subject to the AMT by state and by AGI.76 For example, 22 percent of New York residents with AGI of greater than $1 million are subject to the AMT, whereas only 14.5 percent of Texas residents with AGI of greater than $1 million are subject to it (this difference can likely be attributed to the fact that the average income of New Yorkers with AGI of greater than $1 million is much higher than that of Texas residents in the same income group — that is, New York has more multimillionaires and billionaires than Texas). In any event, being subject to the AMT means that the taxpayer’s ability to take some itemized deductions, such as the SALT deduction, is limited, and I take this effect into account in calculating the SALT tax expenditures by state.77

Figure 1.

In other words, I generally adopt the Joint Committee on Taxation’s method of measuring tax expenditures as “the difference between tax liability under present law and the tax liability that would result from a recomputation of tax without benefit of the tax expenditure provision.”78 In my calculations, I do not consider the behavioral consequences that may follow a repeal of the tax expenditure provision in question or the interdependent nature of related tax expenditure provisions.79 Therefore, while the figures below may represent the federal government’s subsidies to the states,80 they do not represent accurate measures of federal revenue gain if the SALT deduction were to be completely eliminated.

Table 2 illustrates the effect of the SALT deduction, calculated as tax expenditures, on the imbalance of federal payments across states. Columns A and B show, respectively, the total and per capita balances of federal payments without considering the SALT deduction tax expenditure. Columns C and D show, respectively, the total and per capita SALT deduction tax expenditures for each state. Columns E and F show, respectively, the total and per capita balances of federal payments taking the SALT deduction tax expenditure into account. Columns G and H show, respectively, the ratio of federal expenditures to federal tax revenue, with and without considering the SALT deduction tax expenditure. Amounts in columns A, C, and E are in millions of dollars.

Table 2. Effect of SALT Deduction in FY 2017

State

A

Balance of Federal Payments (Without SALT)

B

Per Capita Balance

C

SALT Tax Expenditure

D

Per Capita SALT Expenditure

E

Balance of Federal Payments (With SALT)

F

Per Capita Balance (With SALT)

G

Ratio Without SALT

H

Ratio With SALT

Alabama

39,167

8,034

777

159

39,944

8,193

2.47

2.50

Alaska

7,586

10,254

95

128

7,681

10,383

2.40

2.42

Arizona

38,884

5,516

1,601

227

40,485

5,743

1.89

1.92

Arkansas

2,671

889

594

198

3,264

1,087

1.08

1.1

California

-4,383

-111

25,813

655

21,430

544

0.99

1.05

Colorado

716

127

1,995

355

2,710

483

1.01

1.05

Connecticut

-16,411

-4,592

3,205

897

-13,207

-3,695

0.71

0.77

Delaware

-5,535

-5,784

303

316

-5,233

-5,467

0.68

0.69

Florida

44,785

2,135

4,558

217

49,343

2,352

1.23

1.26

Georgia

10,264

986

3,179

305

13,443

1,291

1.11

1.14

Hawaii

10,514

7,382

448

315

10,962

7,697

2.12

2.16

Idaho

7,065

4,110

453

264

7,518

4,374

1.68

1.72

Illinois

-30,571

-2,391

5,597

438

-24,974

-1,953

0.81

0.85

Indiana

8,839

1,327

1,473

221

10,312

1,548

1.15

1.17

Iowa

5,277

1,679

1,004

319

6,280

1,998

1.21

1.25

Kansas

5,734

1,970

808

277

6,541

2,247

1.22

1.26

Kentucky

35,681

8,011

1,082

243

36,763

8,254

2.02

2.05

Louisiana

9,286

1,988

781

167

10,067

2,155

1.22

1.24

Maine

9,355

7,007

407

305

9,761

7,312

2.16

2.21

Maryland

33,808

5,611

3,608

599

37,416

6,210

1.47

1.53

Massachusetts

-34,266

-4,993

4,435

646

-29,832

-4,347

0.70

0.74

Michigan

25,683

2,574

2,868

287

28,551

2,862

1.31

1.35

Minnesota

-40,028

-7,189

2,757

495

-37,270

-6,693

0.62

0.64

Mississippi

26,014

8,701

413

138

26,427

8,839

3.22

3.25

Missouri

350

57

1,667

273

2,017

330

1.00

1.03

Montana

6,153

5,842

300

285

6,453

6,128

2.01

2.06

Nebraska

-7,714

-4,023

613

320

-7,101

-3,703

0.70

0.72

Nevada

7,100

2,389

593

200

7,693

2,588

1.33

1.36

New Hampshire

2,855

2,115

505

374

3,359

2,489

1.24

1.28

New Jersey

-46,153

-5,192

6,827

768

-39,326

-4,424

0.68

0.73

New Mexico

22,690

10,839

338

161

23,028

11,000

3.53

3.56

New York

-47,732

-2,436

16,883

862

-30,848

-1,575

0.82

0.89

North Carolina

30,225

2,943

2,717

265

32,942

3,207

1.36

1.40

North Dakota

1,249

1,654

115

153

1,364

1,806

1.19

1.21

Ohio

-16,397

-1,406

3,211

275

-13,186

-1,130

0.88

0.91

Oklahoma

17,944

4,563

701

178

18,645

4,741

1.66

1.69

Oregon

13,330

3,215

1,850

446

15,180

3,661

1.41

1.47

Pennsylvania

16,053

1,255

4,399

344

20,452

1,599

1.11

1.15

Rhode Island

-2,324

-2,200

455

431

-1,869

-1,769

0.84

0.87

South Carolina

33,104

6,593

1,145

228

34,249

6,821

2.24

2.29

South Dakota

1,377

1,577

117

134

1,494

1,711

1.17

1.19

Tennessee

7,209

1,075

830

124

8,038

1,198

1.10

1.12

Texas

-1,970

-70

6,069

214

4,099

145

0.99

1.02

Utah

1,410

454

953

307

2,363

761

1.06

1.11

Vermont

3,553

5,689

220

352

3,773

6,041

1.80

1.85

Virginia

89,601

10,585

3,696

437

93,297

11,021

2.03

2.07

Washington

-5,352

-721

2,068

278

-3,284

-442

0.94

0.96

West Virginia

17,574

9,671

265

146

17,839

9,817

3.52

3.56

Wisconsin

2,322

401

2,229

385

4,551

786

1.04

1.09

Wyoming

2,727

4,711

101

175

2,829

4,886

1.62

1.64

As Table 2 demonstrates, the SALT deduction effectively but imperfectly mitigates the uneven distribution of federal expenditures and the imbalance of federal payments among states. On an absolute scale, SALT deduction tax expenditures make up a substantial portion of the states’ deficits in federal payments. For the 13 states that contribute more to federal revenue than they receive in federal spending, their total deficit in federal payments amounts to $259 billion. SALT deduction tax expenditures bring that figure down to $180 billion — a 31 percent decrease in the total deficit amount. For some states, the SALT deduction tax expenditure turns their deficit in federal payments into a surplus: In 2017 California, for example, contributed over $4 billion more in federal tax revenue than it received in federal spending. When we take SALT tax expenditure into account, however, California ends up having a surplus in federal payments amounting to about $20 billion. For other states, SALT tax expenditure does not turn their deficits into surpluses, but it at least mitigates their deficit. New York, for example, contributed over $47 billion more in federal tax revenue than it received in federal spending. When we take SALT tax expenditure into account, however, New York’s deficit goes down to about $30 billion. This result is not surprising: Given the uneven distribution of federal spending and the imbalance of federal payments,81 deficit states must rely more on their own tax revenue to provide local benefits and services. The higher state and local tax burdens imposed on the residents of those states then result in higher SALT deductions and SALT tax expenditures.

Table 3. Estimated Effect of the TCJA Cap

State

A

SALT Tax Expend. 2017

B

Est. TCJA SALT Tax Expend.

C

Percentage Change

D

Balance of Payments With SALT

E

Per Capita Balance

F

Balance After TCJA Limit

G

Per Capita Balance After TCJA

Alabama

777

645

-17.1%

39,944

8,193

39,812

8,166

Alaska

95

90

-5.1%

7,681

10,383

7,676

10,376

Arizona

1,601

1,239

-22.6%

40,485

5,743

40,123

5,692

Arkansas

594

424

-28.7%

3,264

1,087

3,094

1,030

California

25,813

13,607

-47.3%

21,430

544

9,224

234

Colorado

1,995

1,516

-24.0%

2,710

483

2,232

397

Connecticut

3,205

1,647

-48.6%

-13,207

-3,695

-14,764

-4,131

Delaware

303

254

-16.2%

-5,233

-5,467

-5,282

-5,519

Florida

4,558

3,461

-24.1%

49,343

2,352

48,245

2,300

Georgia

3,179

2,409

-24.2%

13,443

1,291

12,673

1,217

Hawaii

448

365

-18.5%

10,962

7,697

10,879

7,639

Idaho

453

355

-21.7%

7,518

4,374

7,420

4,316

Illinois

5,597

4,265

-23.8%

-24,974

-1,953

-26,306

-2,057

Indiana

1,473

1,171

-20.5%

10,312

1,548

10,010

1,503

Iowa

1,004

851

-15.2%

6,280

1,998

6,128

1,949

Kansas

808

629

-22.1%

6,541

2,247

6,363

2,186

Kentucky

1,082

918

-15.1%

36,763

8,254

36,599

8,217

Louisiana

781

614

-21.4%

10,067

2,155

9,900

2,120

Maine

407

357

-12.2%

9,761

7,312

9,712

7,275

Maryland

3,608

2,639

-26.8%

37,416

6,210

36,448

6,049

Massachusetts

4,435

2,954

-33.4%

-29,832

-4,347

-31,312

-4,562

Michigan

2,868

2,304

-19.7%

28,551

2,862

27,987

2,805

Minnesota

2,757

1,999

-27.5%

-37,270

-6,693

-38,029

-6,830

Mississippi

413

352

-14.6%

26,427

8,839

26,367

8,819

Missouri

1,667

1,280

-23.2%

2,017

330

1,630

267

Montana

300

245

-18.3%

6,453

6,128

6,398

6,076

Nebraska

613

514

-16.1%

-7,101

-3,703

-7,200

-3,755

Nevada

593

449

-24.3%

7,693

2,588

7,549

2,540

New Hampshire

505

454

-10.0%

3,359

2,489

3,309

2,451

New Jersey

6,827

4,152

-39.2%

-39,326

-4,424

-42,001

-4,725

New Mexico

338

294

-13.0%

23,028

11,000

22,984

10,979

New York

16,883

7,447

-55.9%

-30,848

-1,575

-40,285

-2,056

North Carolina

2,717

2,193

-19.3%

32,942

3,207

32,418

3,156

North Dakota

115

98

-15.5%

1,364

1,806

1,346

1,783

Ohio

3,211

2,706

-15.7%

-13,186

-1,130

-13,691

-1,174

Oklahoma

701

567

-19.1%

18,645

4,741

18,511

4,707

Oregon

1,850

1,407

-24.0%

15,180

3,661

14,737

3,554

Pennsylvania

4,399

3,620

-17.7%

20,452

1,599

19,673

1,538

Rhode Island

455

365

-19.8%

-1,869

-1,769

-1,959

-1,854

South Carolina

1,145

971

-15.2%

34,249

6,821

34,075

6,786

South Dakota

117

106

-9.8%

1,494

1,711

1,483

1,698

Tennessee

830

739

-10.9%

8,038

1,198

7,948

1,185

Texas

6,069

5,466

-9.9%

4,099

145

3,496

123

Utah

953

745

-21.8%

2,363

761

2,156

695

Vermont

220

192

-12.8%

3,773

6,041

3,745

5,996

Virginia

3,696

2,956

-20.0%

93,297

11,021

92,557

10,934

Washington

2,068

1,994

-3.6%

-3,284

-442

-3,357

-452

West Virginia

265

229

-13.6%

17,839

9,817

17,803

9,798

Wisconsin

2,229

1,842

-17.4%

4,551

786

4,164

719

Wyoming

101

69

-32.3%

2,829

4,886

2,796

4,829

Of course, SALT tax expenditures also add to the (in some cases, already large) surpluses of states that receive high amounts of federal spending relative to their contributions to federal tax revenue. But these increases in surpluses are much smaller than the reductions in deficits. For the 37 states that received more in federal spending than they contributed to federal revenue, their total surplus in federal payments amounts to $598 billion. SALT deduction tax expenditures bring that figure up to $640 billion — an increase of about $42 billion, or 7 percent. Compare this with the effect of SALT deduction tax expenditure on the deficit states: SALT reduces their deficit from $259 billion to $180 billion — a reduction of about $79 billion, or 31 percent. In other words, 13 deficit states in 2017 received 65 percent of the SALT tax expenditures, whereas the 37 surplus states received only 35 percent of the SALT tax expenditures. Also, if we use a more accurate baseline (not the break-even baseline, but the baseline of the median state in its balance of federal payments), this difference becomes even more prominent. The 25 states with below-median per capita balances of federal payments received roughly $95 billion, or 79 percent, of the total SALT tax expenditures, whereas the 25 states with above-median per capita balances of federal payments received only $26 billion, or 21 percent, of the total SALT tax expenditures. Again, this result is not surprising: Surplus states or states with above-median balances of federal payments do not need to rely as heavily on state and local taxation in order to provide local services and public goods. The lighter tax burden that residents of these states face translates into lower SALT deductions and lower SALT tax expenditures.

Figure 2.

Figure 2 illustrates the total balance of federal payments among the states after taking SALT deductions into account as tax expenditures.

C. TCJA’s Limit on SALT Deductions

Table 3 shows the estimated effect of the TCJA’s limit on SALT deductions ($10,000). Column A shows the SALT tax expenditures by state before the limit. Column B shows the estimated SALT tax expenditures by state after the limit. I estimate the effect of the TCJA limit on SALT deductions conservatively82 — whenever the average amount of SALT deductions taken within an AGI group exceeds $10,000, I assign the highest possible deduction per return ($10,000) to that group and estimate the tax expenditure based on the highest possible deduction amount that the group can take given the limit. In practice, therefore, the effect of the TCJA limit will be much more pronounced: The SALT deductions that taxpayers actually will take are likely much smaller than the highest possible amount. Column C shows the percentage change in SALT tax expenditures caused by the TCJA limit. Columns D and E, respectively, show the total and per capita balance of federal payments by state in 2017. Columns F and G, respectively, show the estimated total and per capita balance of federal payments by state after taking the TCJA limit into account. Amounts in columns A, B, D, and F are in millions of dollars.

Figure 3.

As Table 3 shows, the TCJA limit substantially impairs the effectiveness of the SALT deduction in mitigating the imbalance of federal payments. Unsurprisingly, the states with some of the largest deficits in federal payments can expect the largest decreases in SALT tax expenditures: California, Connecticut, New Jersey, and New York all face reductions of 40 percent or more in SALT deduction tax expenditures when the TCJA limit kicks in. New York in particular is estimated to see its SALT tax expenditure shrink by more than half (55.9 percent), from approximately $16.9 billion to $7.4 billion, resulting in a 32 percent increase in its deficit in federal payments. California — another high-tax jurisdiction suffering from a deficit in federal payments — is estimated to see the largest decrease in SALT deduction tax expenditure, from $25.8 billion to $13.6 billion.

Figure 3 illustrates the total balance of federal payments among the states after taking SALT deductions into account as tax expenditures and estimating the impact of the TCJA.

IV. Conclusion

In addition to impairing the SALT deduction’s effectiveness in mitigating the balance of federal payments, the TCJA limit illustrates at least two inherent shortcomings in using the SALT deduction to effectuate federalism. First, the SALT deduction simply is highly regressive: Before the TCJA limit, only 19 percent of SALT deduction tax expenditures were distributed to households with an AGI of lower than $100,000, even though this AGI group constitutes the vast majority of American households. Eighty-one percent of SALT deduction tax expenditures therefore benefited households with more than $100,000 of AGI — a small minority of American households. The TCJA’s SALT limit, while it was probably intended to punish high-tax jurisdictions, will likely mitigate this regressivity. In general, households with AGIs of lower than $100,000 are not substantially affected by the TCJA’s limit, while the SALT deduction tax expenditure for households with AGIs of higher than $100,000 will plummet by at least 35 to 40 percent. This means that after the TCJA limit, households with AGIs of lower than $100,000 are likely to see their share of SALT deduction tax expenditures rise from 19 percent to 37 percent.

Second, because federal expenditures are so unevenly distributed, it is unrealistic to expect SALT deductions to close the gap between deficit and surplus states. Even before the TCJA limit, SALT deduction tax expenditures still leave high-tax states such as Connecticut, Massachusetts, New Jersey, and New York running large deficits in federal payments in the billions of dollars. The TCJA limit has exacerbated this shortcoming.

Therefore, a much better way of preserving federalism in taxation is for the federal government to adopt a more balanced approach to appropriations and expenditures. Given regional differences, it is not necessary that each state receives the exact same amount of federal spending — but the current state of highly uneven distribution of federal spending is not sustainable. Given polarized politics,83 it is unlikely that Congress or the executive branch can reform federal expenditures in such an effective way. Before that happens, then, SALT deductions still have some role to play in our system of federalism.

Appendix

This appendix reproduces the three figures from Section III together with a map of how Americans voted in the 2016 presidential election.84 The connection between political preference and balance of federal payments is striking: Republican-leaning states tend to run high surpluses with the federal government, whereas Democratic-leaning states tend to run high deficits with the federal government. Two of the notable exceptions are Virginia and Maryland, which are anomalies — their surpluses come primarily from the large number of federal agencies present in those two states.

2016 Presidential Election

Balance of Federal Payments

Balance of Federal Payments Accounting for SALT Deductions as Tax Expenditures

Balance of Federal Payments After TCJA Cap

FOOTNOTES

1 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, P.L. 115-97, 131 Stat. 2054 (2017) (codified in scattered sections of U.S. Code title 26).

2 See, e.g., Michael J. Graetz, “Foreword — The 2017 Tax Cuts: How Polarized Politics Produced Precarious Policy,” 2018 Yale L.J. Forum 315, 315 (2018).

3 Section 13001, 131 Stat. at 2096 (codified at IRC section 11).

4 Section 14201, 131 Stat. at 2288 (codified at IRC section 951A). Since the corporate tax rate is 21 percent, and IRC section 250 allows a 50 percent deduction, the effective tax rate on GILTI is 10.5 percent. Starting in 2026, the TCJA will reduce the 50 percent deduction to 37.5 percent, resulting in an effective tax rate of 13.125 percent on GILTI. Section 250(a)(3)(B).

5 See, for example, section 168(k), which permits 100 percent bonus depreciation for some property (in general, property with a life of shorter than 20 years) through 2022, with bonus depreciation percentage then phased out; and section 179, which permits small businesses to deduct immediately the cost of some tangible business property, up to $1 million per year.

6 Thomas Kaplan and Alan Rappeport, “Republican Tax Bill Passes Senate in 51-48 Vote,” The New York Times, Dec. 19, 2017.

7 Id.

8 Section 11042, 131 Stat. at 2085 (codified as amended at IRC section 164).

9 Sarah Almukhtar et al., “How Each House Member Voted on the Tax Bill,” The New York Times, Dec. 19, 2017.

10 H.R. Rep. No. 115-409, at 165 (2017). Of course, it is hard to see why limiting SALT deductions to $10,000 would aid simplicity — after all, the deduction remains on the tax form, and taxpayers would still look at the state and local taxes that they have paid before determining how much (either the total amount that they have paid or the TCJA maximum of $10,000) to deduct.

11 Rachel Greszler, Kevin Dayaratna, and Michael Sargent, “Why Tax Reform Should Eliminate State and Local Tax Deductions,” Heritage Foundation, at 2 (Oct. 16, 2017). This argument — that SALT deductions result in low-tax states subsidizing high-tax states — ignores the uneven distribution of federal expenditures across states. SALT deductions, before the TCJA’s limit, may indeed contribute to an inflated marginal tax rate (like any other tax expenditure), but this “subsidy” takes place against the background of enormous imbalance in federal expenditures, which tend to favor low-tax jurisdictions. Part of the purpose of this article is to examine how much SALT deductions, as a tax expenditure, make up for this imbalance, which we can see as high-tax jurisdictions subsidizing low-tax jurisdictions through uneven distribution of federal spending. See infra Section III.B.

12 Id. at 1.

14 See, e.g., Alicia Parlapiano and K.K. Rebecca Lai, “Among the Tax Bill’s Biggest Losers: High-Income, Blue State Taxpayers,” The New York Times, Dec. 5, 2017; and Carolyn Y. Johnson, Reuben Fischer-Baum, and Aaron Williams, “Blue States Will Be Hit Hardest by GOP Tax Plan’s Limits on Deductions,” The Washington Post, Nov. 3, 2017.

15 Jesse McKinley, “New York and New Jersey File Suit Against Trump Tax Plan,” The New York Times, July 17, 2018.

16 Kaplan and Rappeport, supra note 6. Schumer’s predictions turned out to be accurate: In the 2018 midterm elections, congressional districts with high SALT deductions disproportionately voted for Democrats, who picked up 14 seats among the 50 districts with the highest percentage of tax returns claiming SALT deductions. See Noah Zwiefel, “Did SALT-y Voters Punish Republicans in 2018?” Urban-Brookings Tax Policy Center (Oct. 8, 2019).

17 Complaint and Demand for Jury Trial, New York v. Mnuchin, 18-CV-6427 (JPO), 2019 WL 4805709 (S.D.N.Y. Sept. 30, 2019).

18 Rappeport and Jim Tankersley, “I.R.S. Warns States Not to Circumvent State and Local Tax Cap,” The New York Times, May 23, 2018.

19 Id.

20 See also Eric Rasmusen, “Getting Around the State and Local Tax Deduction Limit,” SSRN Working Paper (Jan. 9, 2018).

22 New York v. Mnuchin, 2019 WL 4805709.

23 Id. *12.

24 Id. *13.

25 U.S. Const. Art. I, section 8.

26 New York v. Mnuchin, 2019 WL 4805709, at *15 (quoting United States v. Ptasynski, 462 U.S. 74, 82, 103 (1983)).

27 Ben Casselman, “Tax Law’s Cap on State and Local Deductions Is Upheld by Court,” The New York Times, Sept. 30, 2019.

29 See also Casselman, supra note 27.

30 See also Kirk J. Stark, “Fiscal Federalism and Tax Progressivity: Should the Federal Income Tax Encourage State and Local Redistribution?” 51 UCLA L. Rev. 1389, 1396 (2004) (“One of the principal features of American fiscal federalism is the federal income tax deduction allowed for taxes paid to state and local governments.”).

31 See Julie Roin, “The Consequences of Undoing the Federal Income Tax,” 70 U. Chi. L. Rev. 319, 332 (2003) (explaining the common fear that “the elimination of the deduction for state and local taxes will reduce subordinate governments’ ability to generate tax revenue”).

32 Compare The Federalist No. 31 (Alexander Hamilton) (describing and rejecting as speculative the fear that “all the resources of taxation might by degrees become the subjects of federal monopoly, to the entire exclusion and destruction of the State governments”) with The Anti-Federalist No. 6 (Brutus) (observing that if taxpayers could not afford to pay a federal tax and a state tax, they would forgo paying the state tax because of the supremacy clause, with the result that “the respective state governments will not have the power to raise one shilling in any way, but by the permission of the Congress”).

33 An Act to Provide Internal Revenue to Support the Government and to Pay Interest on the Public Debt, section 91, 12 Stat. 432, 473-74 (1862) (“[A]ll other national, state, and local taxes, lawfully assessed upon the property or other sources of income of any person . . . shall be first deducted from the gains, profits, or income.”).

34 See 37 Congressional Globe 1194 (Mar. 12, 1862) (statement of House Ways and Means Committee member Justin Morill) (“It is a question of vital importance to [the several states] that the General Government should not absorb all their taxable resources.”).

35 See, e.g., U.S. Treasury Department, Tax Reform for Fairness, Simplicity and Economic Growth 78 (1984).

36 See, e.g., Nonna A. Noto and Dennis Zimmerman, “Limiting State-Local Tax Deductibility: Effects Among the States,” 37 Nat’l Tax J. 539, 546 (1984) (recommending imposing a percentage AGI floor as a way of limiting SALT deduction).

37 See Tax Reform Act of 1986, P.L. 99-514, section 134, 100 Stat. 2085, 2116. In 2004 Congress reintroduced the deduction for state sales taxes, although taxpayers must choose between deducting income taxes or sales taxes. See American Jobs Creation Act, P.L. 108-357, 118 Stat. 1418 (2004).

38 Stark, supra note 30, at 1405 (noting the recognition that “eliminating the deduction would raise the tax price of public goods for itemizing taxpayers, thereby reducing their demand for state and local government services and ‘impairing cities’ ability to provide public services’” (quoting U.S. Conference of Mayors)).

39 See infra Section III.A.

40 In 2016 state and local governments spent approximately $2.9 trillion, roughly equally divided between the states and the local governments. See Urban Institute, “State and Local Finance Initiative.”

41 See infra Section III.A.

42 See infra Table 1.

43 See, e.g., Greszler, Dayaratna, and Sargent, supra note 11; William B. Barker, “The Tax Cuts and Jobs Act of 2017: The SALT Deduction, Tax Competition, and Double Taxation,” 56 San Diego L. Rev. 73, 100 (2018) (“The SALT deduction supports state taxation by providing a subsidy for a state’s own source revenue.”).

44 See generally Daniel Hemel, “Easy on the SALT: A Qualified Defense of the Deduction for State and Local Taxes,” Coase-Sandor Working Paper Series in Law & Economics (Oct. 28, 2017) (providing a survey of arguments urging the repeal of the SALT deduction).

45 See Louis Kaplow, “Fiscal Federalism and the Deductibility of State and Local Taxes Under the Federal Income Tax,” 82 Va. L. Rev. 413, 417 (“Commentators increasingly agree that an important factor bearing on the appropriateness of deductibility is whether individuals’ state and local tax payments are closely related to the public services that individuals receive. . . . The simplest argument against deductibility — that state and local taxes equal benefits received — is stronger in principle than most arguments favoring deductibility.”).

46 See Stark, supra note 30, at 1393 (“For every dollar of state or local taxes that is deductible for federal income tax purposes, the taxpayer, in effect, receives a rebate from the federal government. This rebate . . . reduces the tax price that local residents face for public goods provided by state and local governments.”); and Frank Sammartino and Kim Rueben, “Revisiting the State and Local Tax Deduction,” Urban-Brookings Tax Policy Center, at 7 (Mar. 31, 2016) (the SALT deduction “can also distort choices about the level of subnational government spending, and rather than encouraging state and local governments to provide services that generate national benefits, it may only encourage subnational governments to spend more on strictly local goods and services”).

47 See, e.g., Stark, supra note 30, at 1433 (“As currently structured, this SALT deduction is a highly regressive federal subsidy.”); and Gladriel Shobe, “Disaggregating the State and Local Tax Deduction,” 35 Va. Tax Rev. 327, 375 (surveying the traditional argument that “state and local tax deduction disproportionately benefits the wealthy because the wealthy pay more in taxes and are therefore able to deduct more, and because the federal itemization regime makes it so that most low earners receive no benefit from itemization”).

48 See, e.g., Greszler, Dayaratna, and Sargent, supra note 11 (arguing that elimination of the SALT deduction can fund up to a 16 percent reduction in federal taxes); and Adam Michel, “The SALT Cap Is Fair Treatment for States and Congressional Districts,” Heritage Foundation (Aug. 29, 2018) (“The SALT deduction should be fully repealed. The write-off is an unfair federal subsidy for high-income taxpayers in high-tax states.”).

49 See, e.g., Linda M. Beale, “Congress Fiddles While Middle America Burns: Amending the AMT (and Regular Tax),” 6 Fl. Tax Rev. 811, 862 (2004) (“Taxpayers who live in states with low property taxes and no state income taxes usually will enjoy their full income after federal taxes, while taxpayers who live in a state with high property taxes and high state income taxes often will pay tax on the income that is paid to the state due to the AMT. This appears, at least at first glance, as an inequity between taxpayers based on pure geographical happenstance.” (footnote omitted)).

50 See Brian Galle, “Federal Fairness to State Taxpayers: Irrationality, Unfunded Mandate, and the ‘SALT’ Deduction,” 106 Mich. L. Rev. 805, 851 (2008) (“Where once it was said that paying SALT is simply a freely chosen consumption choice, such that no deduction could ever be justified, there now is at least a possibility that, depending on empirical findings, some deduction could be warranted.”).

51 See Stark, supra note 30, at 1394.

52 The precise cost would, of course, depend on the average effective (federal) marginal tax rate of the local taxpayers; if the rate is 20 percent, for example, then for every $100 of state and local taxes they pay, the true cost — taking into account the $100 SALT deduction and the resultant $20 savings in federal tax liability — is $80.

53 See also Kaplow, supra note 45, at 420-430.

54 See Shobe, supra note 47, at 327 (“[T]he arguments for the deduction apply more strongly to states while the arguments against the deduction apply more strongly to localities.”). Of course, this distinction is a matter of degrees rather than nature. A more precise demarcation for deductibility of state, compared with local, taxes would depend on whether (and the extent to which) state and local taxpayers make use of, for example, public education (usually financed through local property taxes) or Medicaid (usually financed by the states with some federal support).

55 See Hemel, supra note 44, at 3-4.

56 See Larry D. Kramer, “Putting the Politics Back Into the Political Safeguards of Federalism,” 100 Colum. L. Rev. 215, 222 (2000); and Michael W. McConnell, “Federalism: Evaluating the Founders’ Design,” 54 U. Chi. L. Rev. 1484, 1493 (1987).

57 See Charles E. McLure Jr., “Tax Exporting and the Commerce Clause,” Fiscal Federalism and the Taxation of Natural Resources 169 (1983).

58 See Charles M. Tiebout, “A Pure Theory of Local Expenditures,” 64 J. Pol. Econ. 416 (1956).

59 Daniel Shaviro, “An Economic and Political Look at Federalism in Taxation,” 90 Mich. L. Rev. 895, 897 (1992).

60 Id.

61 See David Gamage and Darien Shanske, “Tax Cannibalization and Fiscal Federalism in the United States,” 111 N W. L. Rev. 295, 298 (2017).

62 Id. at 301.

63 See Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice 25 (2002).

64 Data for column A comes from the IRS. See IRS, “Gross Collections, by Type of Tax and State, Fiscal Year 2017.”

65 Data for column B comes from Laura Schultz and Michelle Cummings, “Giving or Getting? New York’s Balance of Payments With the Federal Government: 2019 Report,” Rockefeller Institute of Government (Jan. 8, 2019). The U.S. Census Bureau used to collect data on federal expenditures, but think tanks have undertaken this task (using the same method as the Census Bureau) after the federal government stopped funding the project.

66 Population estimates for 2017 come from the Census Bureau. See U.S. Census Bureau, “State Population Totals and Components of Change 2010-2019.”

67 These states are Alabama, Alaska, Hawaii, Kentucky, Maine, Mississippi, Montana, New Mexico, South Carolina, Virginia, and West Virginia. None of these states, except Virginia (again, because many federal agencies and offices are located there), are traditionally regarded as high-tax states.

69 See supra Table 1.

70 See Schultz and Cummings, supra note 65, at 3 (letter from Robert F. Mujica, director of the budget of New York state).

71 See id.

72 The Congressional Budget Act of 1974, P.L. 93-344, section 3(3).

73 See IRS, “SOI Tax Stats — Historical Tables” (updated Sept. 3, 2020).

74 See Urban-Brookings Tax Policy Center, “Percent of Tax Filers by Marginal Tax Rates” (Oct. 8, 2019).

75 See Rosanne Altshuler and Robert Dietz, “Reconsidering Tax Expenditure Estimation,” 64 Nat’l Tax J. 459, 471-475 (2011) (describing the effect of the AMT on estimating tax expenditures).

76 See Urban-Brookings Tax Policy Center, “AMT by State and by AGI” (Nov. 25, 2019).

77 It is worth noting that the TCJA significantly reformed the AMT so that most taxpayers will not be subject to it from 2018-2025. In 2026, however, the AMT will spring back to life unless Congress extends the TCJA change.

78 See Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2018-2022,” at 13 (Oct. 4, 2018).

79 See U.S. Treasury Office of Tax Analysis, Tax Expenditures for Fiscal Year 2020, at 1 (Oct. 19, 2018).

80 As noted in Section II, the SALT deduction can be framed as two forms of subsidies. See supra text accompanying notes 52-53.

81 See supra Table 1.

82 Because the TCJA raised the standard deduction (to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers), it is also more likely that taxpayers will take the standard deduction rather than make itemized deductions. See section 63(c)(7).

83 See infra Appendix.

84 SeePresidential Election Results: Donald J. Trump Wins,” The New York Times, Aug. 9, 2017.

END FOOTNOTES

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