Tax Law

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SALT, Subsidies, and Subnational Spending

By Alak Mehta

Historically, the Internal Revenue Code has permitted itemizing taxpayers to deduct state and local tax (SALT) payments on their federal tax returns. While this SALT deduction has been adjusted and refined over the years, it has been a mainstay of the federal tax code. As of December 2017, taxpayers were entitled to deduct the full amount of state and local property tax payments, as well as their choice of either state and local income taxes or sales taxes. The Tax Cuts and Jobs Act of 2017 (TCJA) dramatically altered this provision by setting a $10,000 limit on the amount a taxpayer may deduct from her federal taxable income to account for all state and local tax payments. This $10,000 cap on SALT deductibility is scheduled to expire on December 31, 2025, by which point Congress will likely readdress this issue.

This Note proposes that the next iteration of the SALT deduction scheme should allow for full deductibility of state taxes, while retaining a cap on the deductibility of local taxes. This distinction between the treatment of state and local taxes would reflect the relative advantages of public administration at the state level. State-level funding and provision of public services strikes the optimal balance between the competing goals of local administration and redistributive spending. Instituting full state tax deductibility would incentivize a shift in the funding and provision of redistributive federal programs to the state level, and would further the goals of state autonomy and policy innovation. Moreover, reducing or eliminating local tax deductibility would increase the internal policy consistency of the Internal Revenue Code, mitigate the regressive nature of the SALT deduction, and help reduce residential income segregation.

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