Remember when Republicans capped the deductions for state and local taxes (SALT) as part of their overall tax reform package in December 2017? Critics predicted the Apocalypse, and advocates waited excitedly for tax revolts in blue states. Governors in high-tax states accused Donald Trump and the GOP of economic warfare, especially New York’s Andrew Cuomo, and many Republicans didn’t … actually mind that description at all.
Now that the first post-SALT tax season has finally concluded, the Washington Post can now confidently state the scope of the devastation. It’s as big a letdown as the Mueller report:
New York’s governor called it an “economic arrow” aimed at his state. A New Jersey congressman warned the law would cause a population exodus out of the Northeast and possibly a second recession. A Manhattan congresswoman warned it would force dramatic cuts in local budgets for police officers and firefighters.
These were some of the dire warnings Democratic lawmakers issued about the 2017 Republican tax law signed by President Trump, which liberals said would hurt primarily Democratic-voting states by limiting what taxpayers could deduct in state and local taxes (SALT) from their federal tax returns.
But more than a year after Trump’s tax cut was implemented, the harm inflicted by the tax law on Democratic states appears — at least thus far — less significant than Democrats had warned, according to interviews with a half-dozen economists from across the political spectrum.
What about the massive outward migration from high-tax states? That’s not happening either, which might actually be a bit of a relief for the other states:
Still, at least so far, rich people have not en masse fled high tax blue states due to the tax law’s new restrictions, with nonpartisan analysts at Moody’s earlier this month finding “migration from high-tax states is lower than a decade ago,” noting there’s little evidence the tax law is forcing residents to leave states such as New York and California.
That’s not to say that there have been no consequences. Relieved of their responsibility to subsidize state and local taxes elsewhere, the Post acknowledges that taxpayers in red states can now keep a little more of their own money, even if “the difference is not huge.” Upper-end income earners in blue states paid out a little more absent those subsidies, and blue-state budgets took a bit of a revenue hit, too. However, that wouldn’t be from the SALT cap, which had no direct impact on state and local revenues, and might not even be indirectly related to the SALT cap at all.
However, in the longer term, it might. Tax hikes in these states might get a little dicier with voters who suddenly realized how they had been passing off those costs to other states. To some extent these states already know that, which is why New York budget director Robert Mujica is already complaining about the impact on the budget for next year:
“The cap on SALT deductibility will increase taxes by more than $600 billion, overwhelmingly impacting New York and similarly situated states that’s made only more egregious by the fact that New York is already the number one ‘donor state’ in the nation — contributing $36 billion more to the federal government than we get back every year. The SALT cap makes this imbalance worse, raising taxes on New Yorkers by $15 billion annually — all so that large corporations and other states can reap the rewards.”
Other states can reap the rewards? Of what — their own money? The cap limits the amount New York and other states can pass on their taxes to people in other states who never voted on the state and local taxes they subsidized. It created a form of taxation without representation that should offend anyone who understands the history of the US and the nature of the republic. The SALT deduction should have been repealed altogether, not just capped.
Even in its limited fashion, though, the SALT cap is returning accountability to where it belongs — to the elected officials of the states with high tax rates. If New York is worried about an “imbalance” on where their federal tax dollars go, might we suggest telling New Yorkers in federal offices to curtail the reach of the federal government and return more control to the states?