Federal tax reform eliminating state and local tax (SALT) deductions would impact Marylanders more than the residents in any other state – and consequently, Maryland counties, according to The Government Finance Officers Association (GFOA) in The Impact of Eliminating the State and Local Tax Deduction Report.
As evidenced by this map, Maryland residents would be most severely impacted by the elimination of the SALT deduction. According to the report, 45 percent of taxpayers in Maryland currently benefit from the deduction, more than any other state. The average SALT deduction in Maryland is $5,604.
Accordingly, Maryland and its local governments would bear the brunt of this “double taxation” that would result if the deduction were eliminated – leading to pressure to reduce local revenue streams to accommodate for the increase in federal tax liability. From the report:
The SALT deduction reflects a partnership between the federal government and state and local governments. The deduction is fundamental to the way states and localities budget for and provide critical public services, and a cornerstone of the U.S. system of fiscal federalism. It reflects a collaborative relationship between levels of government that has existed for over 100 years. Currently, the SALT deduction is an accepted part of the tax structure that is critical to the stability of state and local government finance.
States, cities, counties, school districts, and other special districts have all established tax rates that operate under the assumption that the federal tax code provides deductibility. Taxpayers would not accept a tax increase in taxes paid, or double taxation, and they would make their displeasure known — especially those in high-tax jurisdictions. Deprived of SALT as a tool for keeping their tax burden lower, they would push back against the tool that they have available to them — local tax rates, which provide the revenues needed to provide essential public services, such as police officers, teachers, firefighters, and other valuable public servants, along with critically important investments that provide for infrastructure, public safety, healthy communities, and many factors contributing to the quality of life.
GFOA finds that elimination of the SALT deduction would adversely impact almost 30 percent of taxpayers nationwide, in all states and at all income levels. More than 50% of the total amount of the SALT deduction went to taxpayers with adjusted gross incomes (AGI) under $200,000 in 2014, the most recent tax year with data available.
From the report:
These tax preferences serve two important goals. First, by allowing taxpayers the ability to deduct state and local taxes (SALT), taxpayers avoid being taxed twice on the same income. Additionally, the deduction on property taxes, along with deduction on mortgage interest, provides a strong incentive for homeownership. The sales tax deduction provides similar incentives for encouraging spending — which facilitates economic growth.