SALT does create distortions of its own, however. SALT was the largest itemized deduction, allowing itemizers to export a portion of their burdens onto Americans elsewhere through the federal tax code. And it is substantial. If I faced a 30% federal marginal tax rate, paying $100 more in SALT lowers my federal tax bill by $30. It only costs me $70. Further, because that subsidy rises, the more property is owned and the higher the income, the distortion overwhelmingly favors the richest, with the middle-class (who own less property, earn less, and face lower marginal tax rates) getting far smaller benefits and non-itemizers getting no subsidy at all.
If citizens do not get their money’s worth from SALT spending, federal deductibility allows state and local governments to export some of the burdens of their waste and inefficiency to others, increasing their incentives for such inefficiency. That is, state governments are subsidized. No wonder Democrat politicians in high budget-high tax states are so strident in their support.
In the example above, federal income tax deductibility means that so long as local citizens get more than 70 cents of value per dollar of spending, and they don’t recognize the added federal burdens they must bear from those similarly subsidized elsewhere, they think they gain.
That encourages those governments to do more of what they should not and what they do badly, not more of what their citizens want them to do.
Author(s): Gary Galles
Publication Date: 19 April 2021
Publication Site: Orange County Register