As the debate over whether to preserve or repeal the State and Local Tax deduction continues, one GOP Maryland State Senator has come out in support of eliminating the popular tax break. In a YouTube video published on October 26th, Maryland State Senator Gail H. Bates expressed her support for ending the vital tax deduction, believing that doing away with the provision is the only way to pass the GOP tax reform proposal.
Under the Republican tax plan, the federal deduction is known as SALT, which allows taxpayers to itemize deductions on their federal income taxes to deduct state and local property and either state and local income taxes or general sales tax, would be removed; affecting millions of American families who take advantage of it annually. Republicans have tried to sell this tax plan to the American electorate by stating that they want to double the standard deduction, a move they suggest will cushion the blow associated with losing the state and local deduction. However, even a rather generous increase in the standard deduction doesn’t eliminate the fact that a substantial portion of taxpayers would experience tax increases. Furthermore, the GOP has claimed that the deduction exclusively benefits the wealthy; however, this is simply not true. In 2015, approximately 40% of Americans making between $50,000 and $75,000 annually and over 70% of taxpayers earning between $100,000 and $200,000 annually utilized the State and Local Tax deduction.
If SALT is repealed, approximately 30% of taxpayers, including citizens in every state and income bracket, would be negatively impacted. In 2015 alone, that would have equated to an astounding figure of approximately 44 million American households, which accounts for over 100 million Americans. That year, over 50% of the sum of the SALT deduction went to taxpayers with adjusted gross incomes lesser than $200,000. This vital tax break also provides taxpayers a sense of peace and level of confidence when making some of their most important decisions. It encourages home ownership, making it more affordable and stabilizing the value of housing and markets. If eliminated, home prices would be adversely affected and housing industries and markets which strongly depend on a thriving housing economy would be disrupted. Statistics overwhelmingly highlight how important the property tax deduction is to middle-class families. Although 70% of SALT deductions for households with an AGI of greater than $200,000 derived from income taxes, a staggering 60% of taxpayer deductions making less than $50,000 comes from the property tax.
Local and state governments depend heavily on the SALT deduction as well, using the revenue to fund a wide array of public services. The deduction encourages higher-income taxpayers to support local and state taxes. Repealing the deduction would greatly disrupt the stability of their tax brackets, complicating state and local governments’ ability to raise the adequate revenue needed to fund K-12, higher education, healthcare and other vital public services. This would almost surely force lawmakers to make tough choices in order to balance the budget such as raising taxes, which would again place a greater burden on the middle class and low-income families than those on the high-end of the tax bracket.
A push to increase responsibilities of the states is a centerpiece of the Republicans’ ten-year budget plan, resulting in drastic cuts to health funding such as Medicaid, and possible decreases in federal support for local and state services such as education, environmental protection, low-income housing, and transportation. Cuts to Medicaid and the Affordable Care Act are estimated to be between $1.3 trillion and $1.9 trillion over the next ten years, which would force states to decrease health services for their residents, raise taxes, cut funding for other services to make available additional funds for offsetting costs, or a combination of these measures. So far, 30 states have already had to address revenue shortfalls for fiscal years 2017 and/or 2018.
Proponents of the tax break highlight how it avoids double taxation on the same income and it aids in providing a more efficient revenue base for local governments to offer and conduct essential services in their communities. Moreover, the deduction provides a more accurate correlation between taxable income and ability to pay. There is also a consensus subsidizing local government expenditures discourages the practice of providing an inadequate amount of government services due to spillover effects. The spillover effect refers to a case when local residents feel less inclined to fund government services that benefit nonresidents as well, prompting them to opt for a lower level of service provision than they would typically prefer without the spillover.
There have been previous attempts to eliminate the SALT deduction, although unsuccessful. In 1983, Senator Bill Bradley of New Jersey and Congressman Dick Gephardt supported a Democratic tax reform proposal that sought to reign in the state and local tax deduction, restricting it to income and real property taxes. The Republican proposal co-introduced by Congressman Jack Kemp and Senator Bob Kasten called for further limitations, making the deduction exclusively for real property taxes. The following year, the Department of the Treasury made public a comprehensive tax reform proposal known as “Treasury I,” which recommended a total elimination of the SALT deduction. These proposals played a central role in deliberations over the Tax Reform Act of 1986; but ultimately, talks of ending the deduction were met by a powerful coalition of resistance. Later during the presidency of George W. Bush, an advisory panel was convened by the president to discuss tax reform. The panel expressed that ending the deduction would result in a “cleaner and broader tax base” in addition to a more equitable tax code; however, this never took place.
The state of Maryland, which has the highest share in the nation with 46% of tax returns utilizing the provision, averaged approximately $13,000 each in deductions in 2015. A number of districts in the state account for over 50% of taxpayers utilizing the SALT deduction. Senator Chris Van Hollen (D-MD) expressed his displeasure with the GOP’s plan to eliminate the SALT deduction, stating that “ending the state income tax deduction for hardworking families in order to give a massive tax giveaway to big corporations and the very wealthy is sadly par for the course in this Republican tax plan.” Income taxes account for 71 percent of the total amount of taxes paid, while property taxes account for 27 percent. According to the Maryland Department of Legislative Services, if the deduction wasn’t available in 2015, Maryland taxpayers would have paid approximately $3 billion more in federal taxes. The impact of losing the State and Local Tax deduction would be sizable in Maryland, stripping thousands of families of a tax break that not only benefits them financially but also affects the quality of the vital community services that they greatly depend on. Whether or not Senator Bates paid mind to these numbers when making her statements, the reality remains -- repealing SALT is bad for Marylanders.