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Tax History: The SALT Deduction Has Always Been Hard to Defend — And to Kill

Posted on Oct. 9, 2017

The most important pay-for in the GOP unified framework is now on the ropes. The deduction for state and local taxes (SALT), long distained by policy experts on both sides of the aisle, seems likely to survive its most recent near-death experience — a turn of events that should surprise exactly no one.

The SALT deduction has found itself on the chopping block numerous times over the past several decades. Champions of fundamental tax reform have long argued that the provision is regressive, expensive, and unfair. But time and again, supporters of the SALT deduction have managed to deflect those arguments, relying on their own claims to tax fairness and fiscal federalism.

Viewed from a certain angle, the SALT deduction looks vulnerable: It seems to pit high-tax blue states against low-tax red states — or, if you prefer, America’s bicoastal elites against the rugged individuals of the heartland.

But like most dichotomies, this one is overdrawn. States that vote blue at the presidential level tend to elect a fair number of Republicans to Congress, making the politics much trickier. As Leonard Burman and John Iselin of the Urban-Brookings Tax Policy Center recently observed, “45 percent of the top 20 [congressional] districts ranked by percentage of residents claiming the deduction have Republican representatives.”

You don’t have to lose many of those blue-state Republicans before you also lose the battle for repealing the SALT deduction. That fact hasn’t been lost on Republicans, nor has the broader political danger surrounding repeal. “In the House of Representatives, there are 14 Republicans from California, 9 Republicans from New York, and 5 Republicans from New Jersey,” Jim Geraghty wrote recently for the National Review online. “How many of those Republicans get reelected if their constituents feel like they missed out on the tax cut the rest of the country got?”

Despite such numbers, it’s easy to understand why Republican leaders have been willing to roll the dice on repealing the SALT deduction: It’s worth a lot of money. Repeal would free up more than $1 trillion over the next 10 years. Moreover, the provision is widely disparaged for the regressive distribution of its benefits, not to mention its tendency to subsidize state-level spending. In a recent article, my colleague Martin A. Sullivan examined those arguments and many others, noting the complexities that surround even the most compelling arguments against the SALT deduction (Prior analysis: Tax Notes, July 10, 2017, p. 137). But he still concludes that repeal is the most viable option in “the scavenger hunt for revenue raisers.”

All of which may be true. But that doesn’t mean repeal would ever be easy — or even likely. The history of past attempts to curb or eliminate the SALT deduction is not encouraging. Arguments in defense of the SALT deduction may seem weak to experts, but they have repeatedly swayed lawmakers. Champions of the provision have defended it on two principal grounds. First, as a way to protect the tax base of subnational governments from incursions by a revenue-starved Congress. Second, they have described the deduction as a defense against the double taxation of individual income.

More to the point, past efforts to repeal the SALT deduction have relied on its disparate geographic impact to mobilize support for its abolition. But those disparities, while clear in the data, didn’t do much to bolster the case for repeal when it actually had a chance in 1986.

An Origin Story

It’s worth pausing to consider the origins of the SALT deduction. The provision has been a feature of federal income taxation since 1862, but its roots run even deeper in U.S. history.

Since the early years of American nationhood, political leaders have been arguing about the need to protect state revenue sources from federal encroachment — as well as the dangers of double taxation to individual taxpayers. Initially, at least, champions of a strong federal power to tax were able to deflect both arguments.

In a 1986 article for Publius, Sarah Liebschutz and Irene Lurie noted the importance of state taxation in arguments over ratifying the Constitution. In particular, supporters of a broad federal taxing power “argued at length against those who feared 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.’” Federalists believed those worries were overstated, arguing that Americans would police the boundaries between state and federal authority by voting to preserve the separate spheres.

Federalist leaders were also scornful of warnings about double taxation. As they wrote in The Federalist No. 36:

Many spectres have been raised out of this power of internal taxation to excite the apprehensions of the people: double sets of revenue officers, a duplication of their burdens by double taxations . . . have been played off with all the ingenious dexterity of political legerdemain. As to the suggestion of double taxation, the answer is plain. The wants of the Union are to be supplied in one way or another; if to be done by the authority of the federal government, it will not be to be done by that of State government. The quantity of taxes to be paid by the community must be the same in either case.

Federalists won these arguments, at least over the short term, but concerns about federal encroachment remained a live issue. They surfaced most obviously during the Civil War when lawmakers devised a new federal tax on personal income. As passed, the Revenue Act of 1862 allowed a deduction for taxes paid to state and local governments. Congress seemed to be responding to the worries of state officials about the fiscal capacity of subnational jurisdictions. Consider, for instance, the comments of Rep. Justin Morill, a Vermont Republican and member of the House Ways and Means Committee:

It is a question of vital importance to [the States] that the General Government should not absorb all their taxable resources — that the accustomed objects of State taxation should, in some degree at least, go untouched. The orbit of the United States and the States must be different and not conflicting. Otherwise, we might perplex and jostle, if we did not actually crush, some of the most loyal States of the Union.

In historical treatments on the SALT deduction, that statement has been invoked to explain its origins. But it’s unclear that Morrill was actually talking about the deduction; it seems more likely that he was explaining the broader decision to devise an entirely new sort of tax; because the states did not impose income taxes, Congress adopting one was itself an expression of fiscal federalism. Morrill, moreover, didn’t explicitly link his statement to the deduction.

Still, by its very nature, Morrill’s statement does suggest that worries about federal encroachment were an important factor shaping Civil War taxation. And since the taxes paid deduction was an important element of the new income tax, it seems possible that encroachment concerns may have helped prompt its creation.


The SALT provision of the 1862 tax disappeared with the income tax itself in 1872. It returned, on paper if not in practice, when the income tax was briefly revived in 1894 (before being struck down by the Supreme Court in the 1895 Pollock decision). But when the income tax returned for good in 1913, it brought the SALT deduction back for the long haul.

Over the decades, the deduction evolved to reflect its fiscal environment. When states began to rely on sales taxes, the deductibility of those levies in the federal system was made explicit. The introduction of the standard deduction in 1944 also reshaped the SALT deduction, reducing its scope dramatically (and shifting the distribution of its benefits up the income scale). Later revisions in the 1960s and 1970s modestly curbed the deduction, but it remained largely intact through the 1980s.

Its survival, however, did not reflect any sort of elite consensus that the deduction was a good idea. Indeed, policy experts were increasingly hostile to it. In earlier decades, the deduction had escaped careful scrutiny, perhaps because it was widely perceived to be necessary in a system marked by high marginal rates; many experts believed that absent the deduction, the combination of federal and state income taxes might have approached confiscatory levels.

By the late 1970s, however, the SALT deduction had a target on its back, and tax reformers began to call regularly for its elimination. Most notably, Treasury urged its repeal in its famous series of tax reform studies conducted in the late 1970s and early 1980s. The 1984 version of the indictment was especially clear:

The current deduction for State and local taxes disproportionately benefits high-income taxpayers residing in high-tax States. The two-thirds of taxpayers who do not itemize deductions are not entitled to deduct State and local taxes, and even itemizing taxpayers receive relatively little benefit from the deduction unless they reside in high-tax States. Although the deduction for State and local taxes thus benefits a small minority of U.S. taxpayers, the cost of the deduction is borne by all taxpayers in the form of significantly higher marginal tax rates.

As the drive for tax reform gathered steam during President Reagan’s second term, the repeal of the SALT deduction emerged as a pivotal element in the evolving package of reforms. Indeed, administration officials considered it a make-or-break issue. And initially, at least, they managed to convince some key lawmakers, including Ways and Means Chair Dan Rostenkowski, D-Ill.

But champions of the SALT deduction, including politicians from the high-tax states that stood to lose the most, were quick to mobilize opposition. “New York Governor Mario Cuomo had raised that issue to the level of righteousness,” observed Jeffrey Birnbaum and Alan Murray in Showdown at Gucci Gulch. Cuomo had ample support from New York Republicans, too, including Sen. Al D’Amato. Party lines were immaterial. “We’re here tonight to underscore this is not a partisan issue,” declared one Democratic lawmaker during a rally to defeat repeal. “It is a matter of survival.”

Birnbaum and Murray called the battle to defeat SALT repeal “one of the most persistent and pervasive lobbying campaigns of the tax reform story.” But their book also recounted the misplaced optimism of the pro-repeal forces: “If tax reform ended up as a fight between New York and the rest of the country, the administration strategists thought, New York would surely lose.”

As it turned out, however, New York was hardly alone.

Then, as now, champions of the SALT deduction were quick to point out that although high-tax states had the most to lose, even low-tax states were home to many who relied on the deduction. A purpose-made lobbying group known as the Coalition Against Double Taxation (recently revived in this year’s fight to defeat repeal) developed data showing the nationwide impact of eliminating the SALT deduction. The coalition offered wavering lawmakers targeted information on the importance of the deduction in their own districts.

The anti-repeal forces quickly made headway. Even supporters of repeal began to realize that the low-tax/high-tax dichotomy was a poor foundation for their campaign. Rep. Ed Jenkins, a Georgia Democrat, was a case in point. “To his own amazement, Jenkins discovered that members opposed fiddling with the deduction no matter how low their own state’s taxes were,” recounted Birnbaum and Murray.

Eventually, Rostenkowski and his negotiating partners in the Reagan administration were forced to acknowledge that full repeal of the SALT deduction was a nonstarter. Ultimately, the 1986 Tax Reform Act eliminated the deductibility of state sales taxes, but it preserved the deductibility of income and property taxes.

1986 is instructive. Then, as now, advocates of repeal vested their hopes in the provision’s disparate geographic impact. But then, as now, those disparities proved inadequate to the task of assembling a consensus for repeal.

Opponents of the SALT deduction, of course, can make a strong case on the merits: Despite the intricacies of its operation and its interaction with other elements of the tax system, the deduction is still regressive and it still operates as a subsidy for state spending.

But curbing any tax provision with such a large — and geographically diverse — constituency will always be hard. That’s especially true when offered up more or less by itself. Without the company afforded by other big-ticket base broadeners, repeal of the SALT deduction will always be inherently vulnerable.

Which should have been obvious from the start.

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