As the debate around tax reform heats up, there are several misperceptions and inaccuracies being advanced about the deduction for state and local taxes (SALT).
Myth: The deduction for state and local taxes is a “loophole” in the tax code.
Fact: The deduction for state and local taxes reflects mandatory tax payments and supports public services that benefit all citizens such as K-12 schools, law enforcement and public safety, transportation and infrastructure, and vital community and public health services. This provision has been a feature of the tax code for more than 100 years. In 1913, the first federal income tax form allowed taxpayers to deduct state and local taxes, one of only six deductions allowed at the time. Even the federal Civil War tax in 1862 included a deduction for SALT.
Myth: The deduction for state and local taxes is one of the largest expenditures in the tax code.
Fact: The SALT deduction ranks eighth on a list of the top federal tax expenditures from 2013-2017. Several other tax expenditures are costlier, including reduced rates on dividends and long-term capital gains (#2), net exclusion of pension contributions and earnings (#3) and the Earned Income Tax Credit (#5).
Myth: The deduction for state and local taxes subsidizes and benefits a small handful of high-tax, blue states such as New York, New Jersey, California and Connecticut.
Fact: Taxpayers in all 50 states – and both Democratic and Republican congressional districts – benefit from the SALT deduction. For example, more than 90 percent of middle income taxpayers in Utah and more than 83 percent of middle income taxpayers in Texas claim the SALT deduction. Of the top 20 highest-SALT congressional districts, 45 percent have Republican representatives.
Meanwhile, high-tax states aren’t being subsidized by others. To the contrary, low tax states are generally more dependent on the federal government, receiving more in federal funding than they pay in federal taxes. According to one study, Mississippi, Alabama and Louisiana are among the most subsidized states, receiving about $3 in federal spending for every $1 contributed in taxes. New Jersey, New York and Illinois are among the states that receive less than $1 from the federal government for every $1 paid in federal taxes.
Myth: The deduction for state and local taxes primarily benefits high-income taxpayers.
Fact: The SALT deduction is claimed by taxpayers of all income levels. Approximately 40 percent of taxpayers with an adjusted gross income (AGI) between $50,000 to $75,000 claim the SALT deduction. Almost 86 percent of all taxpayers who claim the deduction have an adjusted gross AGI under $200,000. The SALT deduction is especially important for middle income homeowners. Fifty percent of the deductions claimed by taxpayers making $50,000 to $100,000 are for property taxes.
Myth: Most taxpayers will benefit from doubling the standard deduction even if they lose the SALT deduction.
Fact: Eliminating the SALT deduction would raise taxes on middle class homeowners – even if the standard deduction were doubled. A recent PwC study commissioned by the National Association of Realtors found that homeowners with AGI between $50,000 and $200,000 would see an average tax increase of $815 if SALT were eliminated and the standard deduction were doubled.
Myth: Middle income taxpayers will still be able to claim other important deductions like mortgage interest even if they lose SALT.
Fact: SALT is strongly tied to home ownership since the overwhelming number of itemizers who claim the SALT deduction (44 million) deduct property taxes (40.7 million) and mortgage interest (35.4 million). Eliminating SALT will diminish the value of the mortgage interest deduction, resulting in a 10 percent decline in home values in the immediate term.
The SALT Myth vs. Fact list was compiled by Americans Against Double Taxation, a coalition of state and local government organizations, service providers and other stakeholders dedicated to protecting the state and local tax deduction (SALT). For more information, visit AmericansAgainstDoubleTaxation.org.