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Pillars of SALT

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Pillars of SALT

Residents of high-tax states are petrified by the GOP tax plan, thanks to misleading press coverage. December 12, 2017
Economy, finance, and budgets
Politics and law

Republican tax-cut proposals are not popular with voters. A Quinnipiac survey, for instance, found that 53 percent of voters disapprove of the plan, and 61 percent think that it favors the rich. This is a strange outcome, when you consider that the top 1 percent of taxpayers, who pay 27 percent of federal income taxes, would get only 18 percent of the tax cuts in the Senate version of the plan, while the bottom 80 percent, who pay one-third of all federal income taxes, would get 37 percent of the reduction.

One explanation for this disconnect is the almost universally negative coverage of GOP tax plan by a media that no longer even pretends to be nonpartisan. Consider, for instance, how newspapers have described the plan’s most controversial feature: the effort to eliminate or reduce the deduction for state and local taxes (SALT). In high-tax states like New York and New Jersey, journalists have called it “an economic dagger” targeting middle-class residents and implying that as many as half of all households could face higher taxes. Mostly Democratic elected officials—from New York Governor Andrew Cuomo and New Jersey Governor-elect Phil Murphy to California Governor Jerry Brown—have made headlines with their objections.

Most media coverage focuses on what taxpayers would lose—namely, a big SALT deduction—but neglects to explain what they would gain. Since the beginning of October, for instance, newspapers in New York have printed 70 stories about the SALT reform and Governor Cuomo’s objections to it. Many have quoted him saying that the GOP proposals would “rape and pillage” some New York districts, or, more moderately, that the reforms would take a “tremendous toll” on the state. But half of these stories don’t even mention that the plan, which lowers most taxpayers’ rates, would double the standard deduction for individuals and families; and only one story details how the plan would reduce or eliminate the alternative minimum tax, which limits taxpayers’ itemized deductions. Those are significant omissions, considering that doubling the standard deduction alone would offset three-quarters of the SALT deduction that the average New York taxpayer who itemizes would lose under the GOP tax plan, according to the Empire Center. And 483,900 New York households that now pay the AMT could be relieved of that burden. Many are not rich: more than one in five AMT payers in New York earn between $100,000 and $200,000 annually.

It’s true that rich taxpayers in high-tax states would get socked. A Partnership for New York City study estimated that a family in New York making $10 million annually would pay $421,000 a year more in taxes under the Republican Senate bill, largely because of the lost SALT deduction. That’s compared with a tax savings of almost $72,000 for the same family in Florida, a state with no income tax, where SALT deductions won’t be missed. But the study also shows that for New York families earning between $100,000 and $500,000, the Senate bill cuts taxes. Even for households earning $1 million, the added tax bite is modest—about $3,341. Single taxpayers, who will enjoy a much smaller standard deduction and no child tax credits, will do worse in both places. Those earning $500,000 in Florida and New York would pay more.

These numbers create a problem for legislators in high-tax states, especially Democrats, putting them in the position of objecting to a deeper federal tax bite that, in truth, will “pillage” their wealthiest residents, whom these states already tax heavily. For instance, only about 2,500 households in New York earn $10 million or more annually, but they paid nearly $7 billion in state income taxes in the latest year for which data are available. In these states, politicians’ real fear is not, as some stories suggest, a middle-class exodus, but rather, the flight of high-earning individuals who are already shouldering a heavy tax burden and might now decide to move elsewhere. Politically, it’s easier to make a case against the GOP tax plan by implying that middle-class residents will take a heavier tax hit—even though the facts show otherwise.

Photo by Drazen_/iStock

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