Supreme Court Rules Correctly on State Tax Deduction (Commentary)

Correctamundo, as they say.

The states that pursued this audacious court challenge were New York, Connecticut, Maryland and New Jersey—four solid “blue,” high-tax states. And while their legal-challenge strategy was almost certainly doomed from the start, it’s no wonder they’re unhappy about the SALT cap. Capping the deductibility of state and local taxes was targeted precisely at such states.

We at IPI have written about this many times: Because the federal tax code formerly allowed unlimited deductions from federal taxes for state and local taxes, the federal tax code essentially subsidized high-tax blue states. Why care about your state’s high taxes if you can just deduct them all from your federal taxes?

So there was never going to be much political pressure within high-tax states to get their taxes under control so long as the federal tax code (i.e., all taxpayers) were subsidizing their high-tax regimes.

Furthermore, it was frankly unfair for taxpayers in low-tax states to be subsidizing the higher taxes of high-tax states.

That’s why Republican tax reformers had long been looking for an opportunity to right this wrong, and when they had the chance, they did it the right way—through legislation. Not through executive orders, or Treasury Dept. interpretations—actual, real legislation passed by the elected representatives of the people.

That’s one of the reasons the SALT cap withstood the court challenge—because it’s actual legislation. It would be a grotesque overreach for the judicial branch to overturn a legitimate exercise of self-government through the legislative process.

Now, we argued that the SALT cap should be indexed to inflation, but it isn’t. Inflation didn’t seem like a big deal back in 2017, but Biden administration policies have encouraged the return of meaningful inflation, which will result in the SALT cap beginning to hit middleclass families.

We’d like to see someone step up and introduce simple, short legislation that indexes both the SALT cap and capital gains taxes to inflation, since indexing both is inherently fair and innately defensible. Any takers?

Originally published by  Institute for Policy Innovation. Republished with permission.

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