Connecting state and local government leaders
Rep. Adrian Smith, who is vying to be the top Republican on the House Ways & Means Committee, views the state and local tax deduction as a potential federal “subsidy” for liberal policies.
States and local governments could face scrutiny under a Republican-controlled House over whether a federal deduction for the state and local taxes people pay is providing Democratic-leaning states with additional money for liberal causes.
Republicans have long opposed the so-called SALT deduction and capped it back in 2017. They say it primarily benefits residents of Democratic-leaning places, like New York, New Jersey and California, which tend to have higher taxes. Some Democrats are also skeptical of the tax break because it’s typically wealthier individuals who can take greatest advantage of it.
States and localities do not receive federal funding directly as a result of the deduction. But tax experts, along with associations representing local governments, have acknowledged that the write-off may make it easier for governments to raise taxes, knowing that part of any increase would be offset for taxpayers by lowering their federal tax bills.
Rep. Adrian Smith, of Nebraska, who is running to be the top Republican on the House’s tax committee, has zeroed-in on this issue and characterizes the SALT deduction as a federal “subsidy” for states and localities.
If Republicans win a majority in the House this November, and Smith prevails in becoming chairman of the Ways and Means Committee, his spokeswoman told Route Fifty that a priority for the congressman will be to scrutinize the deduction. Particularly, the spokeswoman said, Smith would examine whether it is allowing states and localities to spend more on what he believes are “hyper partisan—and often inappropriate—spending priorities,” including abortion.
“States and localities effectively receive a federal subsidy for whatever they spend money on, even for things which the federal government can’t legally fund directly (abortion services, benefits for illegal immigrants, decriminalizing scheduled drugs, needle exchanges),” the spokeswoman said in an email.
It’s uncertain whether Smith can become the tax panel’s top Republican.
Rep. Jason Smith, of Missouri, who is now the lead GOP member on the House Budget Committee, is also seeking the post. He has pushed for tighter oversight of state and local spending of federal pandemic aid. A Jason Smith spokesman, however, did not comment on Adrian Smith’s views on the SALT deduction.
Adrian Smith’s spokeswoman declined to say what exactly he would do about the tax break.
“We don’t have a specific or new solution in mind when we say it’s something to look at,” the spokeswoman said. “But—if the congressman chairs the committee next Congress—we would begin examining this by holding hearings on state and local budgeting because it is subsidized by the federal tax code.”
His views also make it likely that he would oppose ever raising a cap Republicans placed on the deduction as part of the major tax code changes they made in the 2017, when they were in the majority and Donald Trump was in the White House.
That cap, set to expire in 2025, established a $10,000 limit on the deduction.
Democrats in Congress who represent states most affected by the cap, as well as some state and local officials, have pushed to raise it. One proposal would have lifted the limit to $80,000. But that plan was dropped from potentially being included in the climate and tax law Democrats muscled through Congress this year, after Sen. Joe Manchin—a West Virginia Democrat whose vote was needed to pass the package—came out against raising the cap on the deduction.
The National Association of Counties and the National League of Cities declined to respond to the comments from Smith’s office.
NACo did reiterate in a statement that it is opposed to the federal government interfering in local tax policy and continued to advocate for the cap’s elimination. NACo spokesman Brian Namey said that restoring the full deduction “would strengthen counties’ ability to deliver essential public services, such as emergency response, safety and justice, infrastructure, and public health.”
He also said that the cap, which applies to individual taxpayers, creates a “double standard” because deductions are not limited for businesses.
Meanwhile, tax policy experts said the issues Adrian Smith raises are difficult to sort out.
They agreed the deduction does make it politically easier for state and local lawmakers to raise taxes, knowing constituents can write-off the income used to pay the expense on their federal tax filings. But they also said it’s difficult to know whether the tax break has actually led to more revenues for state and local governments or what that money is being used for.
Richard Auxier, a senior policy associate at the Urban-Brookings Tax Policy Center, for instance, pointed to a 2018 analysis by the center.
States had worried the new $10,000 cap on deductions would put pressure on them to lower their taxes. But the analysis found “little empirical evidence that federal income tax deductibility directly impacts peoples’ willingness to pay higher state taxes.”
It’s also difficult to separate what effect the 2017 cap has had on states’ finances from other factors, like a global pandemic.
Complicating matters further is that the 2017 federal tax policy changes raised the standard deduction taxpayers can claim, leading to more people going this simpler route when filing, rather than itemizing and claiming individual deductions, like the one for state and local taxes.
Auxier rejected the notion that the SALT deduction is a direct subsidy to states and localities. “The federal government is not sending funds as it does for education or the infrastructure package,” he said. “It’s an indirect subsidy.”
He also noted the generally broad agreement among federal lawmakers of all stripes to give states and localities flexibility in their spending decisions and “not to tie their hands too strongly.”
“It’s possible to comb through a jurisdiction’s budget and find one thing you don’t like,” he said, but the amount will likely be “infinitesimally small.” And, he pointed out, the bulk of state and local spending goes to core areas of government like Medicaid, education, highways and police.
Garrett Watson, senior policy analyst at the Tax Foundation, agreed that examining how much of a difference the deduction has on state and local governments is a complex question.
“The jury is still out,” he said.
Watson added that another unknown is the extent to which lowering the amount of state and local taxes that can be deducted encourages people to move out of states with higher taxes.
Even so, lawmakers from states like New Jersey, who favor lifting the cap, say that the $10,000 limit on the SALT deduction drove some of their residents to move to places like Florida.
David Ditch, a policy analyst for the conservative Heritage Foundation and a former budget analyst for the Senate Budget Committee, also said that measuring the influence of the deduction on state and local budgets is complicated.
But, similar to Smith, he says the deduction opens more revenue to states and localities. And, he said, if federal tax policies force states to cut their budgets, lawmakers are unlikely to reduce spending on things with “high political utility.”
“They’re not going to let roads and bridges start collapsing. They’re not going to start defunding schools or public pension plans.” Rather, he said, they might cut programs like those Smith says are on his radar, such as spending to help women travel across state lines to access abortions.
Kery Murakami is a senior reporter for Route Fifty.
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