STUMP » Articles » State and Local Tax Deduction: Who Wins? Who Loses? » 19 October 2017, 18:24

So a little while back, Trump et. al. released a tax policy proposal. Here’s a one-pager, but here is a more comprehensive rundown. I want to point out one part:

It eliminates the deduction for state and local taxes. That would hurt 40 million people, primarily residents in high-tax states like California and New York. But it would add $1.3 trillion to federal revenues.

I am somewhat looking forward to the battle royale over the deductibility of state/local taxes.

Yes, this would hit me personally. But why should the other states subsidize the behavior of profligates like Connecticut, New Jersey, or even Illinois?

The Tax Foundation covers this very well. You need to click that link to get to the interactive map, but I’m going to pull some static images off of the primer they wrote earlier in the year.

Less than a third of federal income tax filers took the state/local tax (SALT) deduction. Btw, in past years, I got hit with the AMT, so the SALT was irrelevant then (if I remember correctly.)

Then, if you look at income brackets, you’ll see that almost all high income people itemize SALT, and that it’s an even higher percentge of their AGI (adjusted gross income) than low income filers.

WHO BENEFITS FROM SALT DEDUCTIONS?

And here’s the big kicker: which states get the biggest benefit. I’m grabbing their data from Table 2, as well as from Census Bureau estimates of state population for 2014.

And I turned it into a graph.

Let me unpack this for you. The vertical scale is what percent of the U.S. population is in that state. The horizontal scale is the percentage of total SALT deduction on federal income taxes are represented by those states.

I put in an orange line where the two percentages are equal — for states above the line, that means that residents are getting less benefit from the SALT deduction than overall; for states under the line, that means they get more benefit than their total population would indicate.

States above the line: Texas and Florida. They don’t have state income taxes (though they do have property & sales taxes).

States below the line: New York, California, New Jersey, and Illinois.

However, perhaps that’s not a reasonable comparison — it’s not like each state has a proportional number of taxpayers, nor amount in federal taxes/AGI.

So here’s another graph – here I compare the state SALT deduction benefit vs. the % of total AGI reported by state.

….and, not much difference. California and New York get the most benefit. Texas and Florida get screwed.

POLITICAL MATH VS. TAX MATH

So here’s the deal for the deal-maker. I am discounting the Congressional Republicans, because they seem like a bunch of do-nothings next to Trump. When Obama had his Democratic Congress, dammit, they got stuff done (well, up until they passed Obamacare, but still.)

Let’s think: Florida & Texas get screwed under the current federal income tax regime, and California and New York get benefits.

Now, Trump is a New Yorker, but also has extensive properties in Florida, at least. And both Florida & Texas aren’t quite so monolithic in their politics compared to New York and California. Not that I really think of Trump as a Republican, but whatever.

Let’s do a rundown of just these 4 states (ignoring Illinois and New Jersey, which are simply less extreme versions of California and New York in politics.)

TEXAS

Congressional reps: 25 R, 11 D
Senators: 2 R
Governor: Repub
2016 election result: Trump, 52.2%

FLORIDA

Congressional reps: 16 R, 11 D
Senators: 1 R, 1 D
Governor: Repub
2016 election result: Trump, 49.02%

CALIFORNIA

Congressional reps: 39 D, 14 R
Senators: 2 D
Governor: Dem
2016 election result: Clinton, 61.6%

NEW YORK

Congressional reps: 18 D, 9 R
Senators: 2 D
Governor: Dem
2016 election result: Clinton, 58.8%

So… California & New York — what exactly is your leverage with Trump? At least with NY, they can try to appeal to Trump’s own concern for his wealth. I assume he’s considered aNY taxpayer, and continues to be one.

However, if he was concerned with his wealth, perhaps he wouldn’t have run for president. After all, his wealth decreased by $600 million by running for Prez.

But I am not so fool as to try to predict what Trump will do. Let’s just consider Congressional Republicans – they’re not looking to take over New York or California seats, as far as I know. I’m in a district that could go Republican, but we haven’t since the 2010 election. And nobody much cares if they’ve got the Westchester Repubs, as far as I can tell.

I have nothing but contempt for the New York State Republican Party. Teddy Roosevelt would spit on these guys. They’re pathetic.

MY OWN INTEREST

I pay taxes to two of the highest tax states there are: New York and Connecticut. I have to pay income taxes to both states, Westchester County takes a lot out of my hide in property taxes, and you better believe I deduct all that. I have an expensive house, and I make deductions on my mortgage interest payments.

I take the maximum deductions I can. I’ve been hit with the AMT in at least one year. I may not be in the 1%, but I’m in the 10% (I think. I had to drop some of my side jobs due to Stu’s chemo treatments).

Do not cry for me.

I will not be happy to pay more in federal income taxes, but if everyone around here has to be hit with the full freight of NY and CT taxes, you better believe there would be a hell of a lot more scrutiny into the local tax regime and which politicians get elected.

I think that in the long run, removal of the SALT deduction will be a boon for New York, though it would involve a lot of short-term pain.

No, I don’t believe this change would turn New York into Texas, but the de Blasios of New York would be a lot less successful in their ploys.

FWIW, I don’t think that the tax policy proposal is going to get through Congress. It’s just a starting point from which one starts negotiating. I imagine that many of the deductions would stay, including SALT.

There are a lot of interesting aspects to the tax policy proposal that I have to think about for my job…so I’m not writing about them here.

I’m not sure if this tax policy debate is going to get anywhere – we’ve already seen multiple issues stall out and die in Congress so far, and there are a bunch of seeming non-starters in the proposal.

Anyway, it’s been a too interesting year, don’t you agree?

HMMMM: Senate rejects effort to save SALT deduction

Spreadsheet behind graphs here.