What’s Going On With Tax Reform? Part 2

Last week, in the blog post, What’s Going On With Tax Reform? Part 1, I mentioned that the U.S. House of Representatives could potentially see draft tax reform legislation as early as this week. One of two potential changes under consideration could mean serious consequences for Marylanders and their counties: elimination of the deductibility of state and local taxes (SALT) from individual federal income tax payments.

What Is SALT? 

The state and local tax deduction allows taxpayers to deduct state and local taxes paid from their federally taxable income. Deductibility of these taxes prevents double taxation, since state and local taxes are mandatory payments.

In 2015, at least 95.8 percent of all itemizers took the SALT deduction. That tax year, over 36 million individuals and families making less than $200,000 claimed the deduction.

The SALT deduction has existed since 1913, when the original federal tax code came to be, with its grand total of three pages.

This one-pager sums it up well.

Americans Against Double Taxation

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The National Association of Counties (NACo) has joined 20 other organizations, including the National Governors Association, National League of Cities, U.S. Conference of Mayors, Government Finance Officers Association (GFOA), and a wide range of other trade associations representing realtors, firefighters, government employees, educational institutions and more to fight against elimination of the SALT deduction. They call their coalition the Americans Against Double Taxation.

From their Coalition Announcement Letter:

We, the undersigned organizations, urge you to maintain the deductibility of state and local taxes in any comprehensive tax reform legislation. …

Eliminating or capping federal deductibility for state and local property, sales and income taxes would represent double taxation on local residents … Elimination would effectively increase marginal tax rates for certain taxpayers, shrink disposable income and harm housing markets, damaging the U.S. and local economies. Finally, any alterations to the deduction would upset the carefully balanced fiscal federalism that has existed since the permanent creation of the federal income tax over 100 years ago.

Discussing the potential for release of more details on potential tax reform this Wednesday, Treasury Secretary Steven Mnuchin told CNN last Sunday:

We’re getting rid of lots of deductions. We’re trying to get rid of state and local deductions to get the federal government out of subsidizing it and yes I can tell you the current plan, for many, many people — it will not reduce taxes on the high end.

Americans Against Double Taxation responded:

Secretary Mnuchin’s comments on the state and local tax deduction (SALT) today are 100% wrong and backwards. SALT protects state and local governments and 44 million taxpayers from exactly the kind of federal money grab the Administration  appears to be proposing. Indeed, SALT was incorporated in the emergency Civil War tax in 1862 and was one of only six deductions in the first federal income tax in 1913, where it has remained ever since, in order to guard against what Hamilton warned in the Federalist Papers could be a ‘federal monopoly, to the entire exclusion and destruction of the State governments.’

What SALT Means In Maryland

Elimination of the SALT deduction would impact Marylanders more than the residents in any other state, according to the GFOA in The Impact of Eliminating the State and Local Tax Deduction Report.  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. Read more in the post, Local Tax Deduction Elimination: “SALT” In Maryland’s Wounds.

Find data on the SALT deduction for your county here.

This is part of a blog series on federal tax reform. Read on: Part 3. Here’s Part 1.