Tax Burden Redistribution: Blue States Seek to Leverage SALT Deductions on Red States

Residents of low-tax states like Florida should prepare for potential fiscal repercussions. A bipartisan coalition of lawmakers from primarily blue states is advocating for the removal of the cap on the federal income-tax deduction for state and local taxes, commonly referred to as SALT.

If successful, this initiative would force middle-class Americans in red states to financially support affluent taxpayers in high-tax regions such as California and New York. These areas have a history of financial mismanagement, and the SALT changes could exacerbate this situation.

Background on SALT Deductions

Prior to the tax reforms implemented during former President Trump’s administration in 2017, SALT deductions provided substantial benefits to affluent residents in high-tax states. By allowing these individuals to deduct state and local taxes from their federal tax obligations, the federal government essentially subsidized their higher state costs.

Consequences of the SALT Cap

The SALT cap, set at $10,000, was a crucial reform aimed at countering an existing inequity. It relieved many middle-class households from unfair taxation burdens while ensuring that wealthier residents in high-tax states felt the full impact of their tax liabilities.

The COVID-19 pandemic and its accompanying lockdowns led to a significant re-evaluation of state tax policies. Many residents fled excessively taxed states for more fiscally responsible locales, evidenced by Florida’s population surge of over one million new residents, while California and New York each saw their populations decline by a similar number.

The Current Legislative Landscape

The pressure is mounting as members of Congress from blue states—across party lines—are threatening to dismantle Trump’s critical tax cuts, which are set to expire unless renewed this year. They are linking the retention of these cuts to the expansion of the SALT deduction. Such a move would represent a grave miscalculation with far-reaching implications.

Expanding the SALT cap primarily benefits high-income earners, specifically households with incomes of $200,000 or above, leaving the middle class largely unaffected. Most middle-class taxpayers utilize the standard deduction, meaning they would see no financial gain from raising SALT limits.

Who Ultimately Bears the Costs?

The question arises regarding who will foot the bill for a potential SALT deduction expansion. The answer is clear: it falls to the majority. Enhanced SALT deductions could lead to budgetary shortfalls, necessitating tax increases for the general populace or resulting in larger, inflationary deficits. Consequently, middle-class families nationwide might find themselves burdened with covering the costs associated with restoring the SALT deduction.

Impact on Federalism and Competition

Moreover, the SALT deduction undermines the principle of competitive federalism, a central tenet of our constitutional framework. The original structure of the Constitution encouraged states to compete for residents and investments by maintaining lower taxes and fewer regulations.

Progressives often criticize this dynamic as a race to the bottom, yet they have historically utilized the federal tax code to undermine this competition—particularly since the adoption of the 16th Amendment in 1913, which expanded federal taxing authority.

A Historical Perspective

In the 1920s, a coalition in Congress introduced a federal estate tax while allowing individuals to deduct state estate tax payments from their federal obligations. This tactic specifically affected Florida, which had repealed its estate tax to attract retirees. As a result, retirees were faced with a choice between high state estate taxes or similarly high federal taxes.

Florida’s legal response to this unconstitutional maneuver, arguing that it effectively imposed federal taxes on some states while exempting others, was ultimately rejected by an increasingly progressive Supreme Court in the 1927 case Florida vs. Mellon.

The Modern Challenge

Contemporary advocates for the SALT deduction in states like California, New York, New Jersey, and Illinois often bemoan a scenario they describe as double taxation. However, they are frequently the ones inflicting higher tax rates on their constituents. Their true concern likely centers on the transparency that Trump’s SALT cap brought to their elevated tax rates, which has become politically treacherous.

Florida’s Position

Florida stands to face significant disadvantages if efforts to reinstate the SALT deduction succeed. Such a change could erode the competitive edge the state currently enjoys, forcing it to subsidize the irresponsible fiscal policies enacted elsewhere. The move would unjustly penalize Floridians for adhering to fiscally prudent governance.

A Call for Rethinking Tax Policies

The SALT deduction should not merely function as a vehicle for welfare for the wealthy. It embodies a strategy to redistribute the tax burden of blue states nationwide. Congress should prioritize repealing this measure rather than reinstating it to benefit the upper echelons of society.