Opinion: Tax reform needs less SALT, more of a spur to save

Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means committee, walks outside the U.S. Capitol, Sept. 28. (Al Drago / The New York Times)

Today was supposed to be the day House Republicans unveiled their tax-reform bill. Instead, the roll-out has been delayed until (at least) Thursday. There seem to be two major hang-ups, one that the GOP should push past and one where lawmakers should tread extremely carefully.

The deduction for paying state and local taxes, often abbreviated as SALT, is one where Republicans need to bite the bullet and proceed. The deduction essentially subsidizes high-tax states and localities, because it offsets part of the over-sized tax burden they place on their residents. As Jason Pye of FreedomWorks points out, 39 percent of the tax benefits from the SALT deduction accrue to people in just three states: California, New Jersey and New York. About 18 percent of the U.S. population lives in those states, so that’s quite the lopsided deal in their favor. Far better to spread that benefit more evenly through lower marginal tax rates across the board.

On the other hand, the GOP’s flirtation with capping the tax benefits of 401(k) contributions is just about the dumbest approach they could take, as a matter of both policy and politics. Tax-advantaged retirement programs are not only popular, but they are a relatively inexpensive way (compared to, say, increasing Social Security benefits) for the government to help enhance Americans’ retirement income. The 401(k) program is one of the main ways through which the middle class participates in equity markets — important, given that for the past several years folks on both sides of the aisle have pointed to stock market gains as signs of the economy’s health. That’s debatable as a useful economic indicator, but it’s not debatable that 401(k)s (as well as IRAs) help more Americans participate in markets, which has proven over the long haul to be a solid way to build wealth.

Think about it this way. Although tax policy should be foremost about finding the least economically damaging way to fund the government, it also provides incentives (intended or not) for certain behaviors. It’s best to limit the latter, in large part because the government isn’t always good at anticipating unintended incentives, but certain tax-code incentives do make sense.

If states, counties or cities want to maintain a high level of taxation and their residents are willing to tolerate that, fine. But if residents’ tolerance for these policies hinge on what amounts to a federal tax subsidy, how is that in the national interest? It isn’t. All the more so when one considers that some of the state and local taxes subsidized in this way are levied for the express purpose of drawing down additional federal funds through grants or welfare programs — essentially allowing those governments to double-dip. It also shouldn’t escape our notice that many of the states with the highest taxes also have the most precarious finances when it comes to debt, because even with the SALT deduction subsidy they aren’t willing to tax at the level needed to maintain their extraordinary levels of spending. There’s nothing about this situation we should want to encourage. On the contrary: Perhaps eliminating this artificial fiscal sweetener would create the opposite incentive, for state and local governments to deal realistically with their finances.

Saving money for retirement, however, is exactly the kind of behavior the federal government should want to encourage. That’s particularly true when, for better or worse, the federal government is entrenched as a guarantor of retirement security. Congressional Republicans are saying the right things about spurring growth through tax reform, and one might argue that there are better ways to encourage economic growth than encouraging retirement savings (although I think there’s a substantive counter-argument that our low personal savings rate and obsession with consumption have actually contributed to economic stagnation). That said, the need for near-term growth does have to be balanced against what makes sense in the long term, which is why I’ve also suggested the key in tax reform is to cut rates, not necessarily revenues. And while it may be possible to make tax benefits such as 401(k)s work better, or for more people, it’s highly unlikely that a contribution cap is the way to do that. That’s particularly true when it appears the main rationale for a cap is to generate tax revenue now, at the expense of the future. A cap would be bad policy for today and tomorrow.

We’ll see how all this shakes out when the bill is finally released. But seeing how the bill treats these two issues will be a quick way to gauge just how serious congressional Republicans are about meaningful tax reform.

Reader Comments 0

77 comments
VRSR
VRSR

Regarding high state tax rates, if the state tax rate info on taxfoundation.org is correct, Georgia actually has a higher state tax rate for certain incomes than California and other "high state tax" states. 


In GA  a married couple is taxed at 6% for income over $10,000.  In CA a married couple is taxed at 2% for income over $16,698. they don't tax at 6% until $59,978. NJ is 5.25% tax on income over $80,000.


So Georgia is really a high state tax state.  On paper it looks less so because 6% is our top rate while CA goes up to 13.3% & NJ goes up to 8.97%.


As always, statistics and numbers can be deceiving.

Doomy
Doomy

I'm gonna set the over/under on how many times the progs will scream "tax cuts for the rich" today at 75. 


All in all it looks like a great tax reform plan. I especially love the part about taking away the state taxes paid deduction on the federal side. I heard Limbaugh say eliminating that would raise 1.3 trillion. Don't know if that's true or not but if so it would make progs and Limbaugh in agreement for once. Cause ya know progs love a good, hefty tax.

Kyle_Wingfield
Kyle_Wingfield moderator

@bendedknee "Bush tax cuts cost  US 6.6 trillion dollars contributing heavily to the  current deficit ."

A dubious claim based on an extremely questionable methodology. He cherry-picks his end points and then attributes all the difference to changes in tax policy, which is pretty absurd. And then you're adding confusion by indicating he's talking about revenues, when he's (to reiterate, absurdly) talking about cumulative GDP increase.

Kyle_Wingfield
Kyle_Wingfield moderator

@bendedknee It's also an impressive exercise in begging the question. He doesn't explain how tax cuts reduced economic growth; he simply asserts it as true and moves on.


Kyle_Wingfield
Kyle_Wingfield moderator

@bendedknee OTOH does this mean liberals now acknowledge faster growth should be a goal? Or are y'all sticking with the mature-economies-can't-grow-more-than-2-percent shtick? 

bendedknee
bendedknee

@Kyle_Wingfield @bendedknee Why would you further cut taxes when US unable to meet its budget  requirements? Where is there proof cutting corporate taxes will increase GDP?. 


Where is that huge stimulus project of  infrastructure spending?


Where are  the 25 million new jobs your  guy  promised?



How much can defense spending be cut and worldwide commitments cut back .?  


Does cutting hundreds of thousands of  government jobs depress the economy?



bu22
bu22

@bendedknee @Kyle_Wingfield  Cutting hundreds of thousands of government jobs leaves workers free to do productive things instead of hampering those who are trying to do productive things.

Kyle_Wingfield
Kyle_Wingfield moderator

@bendedknee "Why would you further cut taxes when US unable to meet its budget  requirements?"

Have you read anything I've said? I have consistently said, cut rates, not revenues.

There is a difference, you know.

Doomy
Doomy

@bu22 @bendedknee @Kyle_Wingfield


Apparently he only sees one side of the equation. Cutting hundreds of thousands of govt jobs also means the taxpayer doesn't have to fork out billions- thus reducing deficit spending. Doesn't surprise me in the least that bended knee doesn't understand that one way of eliminating debt is to cut spending. In fact, he constantly amazes me that the idea of cutting spending to reduce debt never seems to enter them little prog noggins. 

RufusATL
RufusATL

“Where justice is denied, where poverty is enforced, where ignorance prevails, and where any one class is made to feel that society is an organized conspiracy to oppress, rob and degrade them, neither persons nor property will be safe."

-- Frederick Douglass


DMC57
DMC57

To use terminology that should be familiar to most Republicans, the states that benefit most from the state and local tax deduction are the Makers; they put in more money to the Federal government than they get back.  Meanwhile those states that don't benefit from the deduction are the Takers; they get more back from the Federal government than they put in.  

If the Maker states reliably voted Republican, you could bet that the state and local tax deduction would not be on the table for repeal.

SGTGrit
SGTGrit

@DMC57 

The high tax blue states that levy heavy state and local taxes that are deductible on their taxpayers federal taxes benefit whom?  Well the heavy taxes of course benefit the blue state because they get to keep and waste all the over taxed revenue. The blue state tax payer gets an offset to the high state and local taxes that they pay because they can write those taxes off on their federal tax return. Who gets hosed? Well the federal government gets hosed, which indirectly hoses taxpayers in the non-blue states. The blue states are reliably Democrat voters and they're the minority of all the states. So, who're the takers?

Porksoda
Porksoda

The itemized deductions and personal exemptions are already subject to a phaseout. Why not just lower it to like 100K thereabouts and not play partisan politics with the tax code?

bu22
bu22

@Porksoda  Phaseout is the most ridiculous, useless part of the tax code.  Republicans voted for it to hide that they were really increasing taxes.  It complicates the code unnecessarily in numerous places.

independentiii
independentiii

I hope your next article will explain just how elimination of the Estate Tax, which would be a huge windfall for a few thousand families (at the expense of the other 99.99% of taxpayers) makes any sense at all.  Except to the likes of Kochs, Waltons, and TRUMPs.  

bendedknee
bendedknee

Cheney - Deficits do not matter. Don't see Kyle fretting about increased deficit either.

bendedknee
bendedknee

@Kyle_Wingfield @bendedknee increased productivity leading to greater federal revenue was disproven  during Reagan years when big deficits were created for wasted military spending. 

carlalbano
carlalbano

Kyle......these blue states subsidize the red states. Have you considered this in your SALT tax reform opinion

McGarnagle
McGarnagle

Wouldn't surprise me if this doesn't get pass by the end of the year. Theres like 2-3 weeks left in the legislative calendar.

BuckeyeGa
BuckeyeGa

I highly doubt a new tax bill will get passed this year

bu22
bu22

@BuckeyeGa  Ryan and McConnell haven't shown much ability to do anything.  We are a month into the fiscal year and they aren't anywhere close to passing the budget.  All they have is an outline.

FIGMO2
FIGMO2

An invaluable assessment, Kyle.

Perhaps eliminating this artificial fiscal sweetener would create the opposite incentive, for state and local governments to deal realistically with their finances. 

And the fact those three states are blue states would be icing on the cake.

oldpunk
oldpunk

@FIGMO2 @Eye wonder Those "high-tax" states contribute way more to the federal government than their citizens receive. The SALT change will make that worse. If you join it with a state adjustment to make each state contribute their fair share, then fine.

FIGMO2
FIGMO2

@Eye wonder @FIGMO2

Just asking the wealthy to pay their fair share, PeeWee.

I thought that's what you wanted.

If you've changed your mind let me know.

I'm here to make you happy.

schnirt

JohnnyReb
JohnnyReb

@Finn-McCool

Not sure what you are driving toward, but individual states with rights not overshadowed by a central government was a basic in our founding.  We are after all...

The United States of America...

Not just America.

Eustis
Eustis

As long as we have special interest groups and lobbyists, we'll never have an equitable tax system.

Laurie8750
Laurie8750

Good points on SALT.  I hadn't thought about it in the terms you laid out.  As for the 401K, I would most likely invest less without the tax benefit.  Hope Congress understands the consequences of taking that one away.

Eustis
Eustis

Just eliminate All deductions for individuals and corporations. By doing that, we could probably reduce our tax rate to the level suggested under the fair tax.

bu22
bu22

When I first heard about limiting 401(k)s, my first reaction was, "WHAT?!"  More arguments for term limits.  Those people in DC just don't understand anything they are legislating, let alone the real world outside DC.  Whatever you think of DJT, he has so much more common sense than the vast majority of those people inside the Beltway.

Eye wonder
Eye wonder

@bu22


"Nobody knew healthcare could be so complicated."

- President F---g Moron

DeepStateDawg
DeepStateDawg

Also, now that the GOP is in charge? What happened to the "Fair Tax"? 


I mean, what could be better than that? 

JFMcNamara
JFMcNamara

Poor and middle class Republicans need to stop and think.  They are on a slippery slope where they are justifying who deserves "subsidizing" versus who doesn't.


The rich people don't want to subsidize anyone, so they have created a situation where they are able to bank all of their money via low taxes creating massive inequality.  They are also pushing to pass the money they earned to heirs who did nothing to earn it which is the definition of aristocracy (not meritocracy). 


You can be for taxing people via SALT now, but they are going to apply the same justifications to raise taxes on you later.   It will be fair....

JohnnyReb
JohnnyReb

@JFMcNamara

Lots of hyperbole there Mc.  Especially considering the top quintile pays a hugely disproportionate amount of total federal income tax. 

PDPDP8
PDPDP8

As a CPA...can’t let that slide..total LIE! On the tax laws it may look that way but once the higher income tax payers, about 1% of the population take all their “tax write-off’s” their true tax rates drop from 35 to 37% down to 10 to 12 percent. Or in Trumps case, Zero taxes for 12 Years...The majority of our tax revenue comes from the millions of middle income small business owners who do not have access to those rich tax payers writeoffs. No the few thousand million a year income earners.

For a fact, the way Reagan proposed and pushed thru the largest tax cut in 40 years by promising to grow the economy with tax cuts. Sounded good in vudo. Economics but as he left office George HW Bush interdicted the largest increase in American history. FACT.

REMEMBER George H W Bush’s promise, “No new taxes?

By the way...with trump not paying ANY TAXES for at least 10 years, the new tax laws with greatly help reduce his future tax dept...and have his kids 100s of millions in estate tax write-offs. Trump may be crooked but he is not stupid.

DeepStateDawg
DeepStateDawg

Can't take much issue with any of this. 


But, problem is at this point is that the GOP has made taxes, and the cutting thereof, such a dogmatic thing that they have little room to do anything like compromise or negotiate. 


They've hollered themselves into a corner; when Bob and Mary Middle America don't get some kind of windfall, or when the top 1 percent don't get a tax cut... or do ... how will that play?


End of the day, just continuing to blame other people doesn't really cut it.