With SALT deductions again — at least momentarily today — at the center of a Senate legislation battle, I wanted to write out in one place why reducing the SALT deduction is terrible policy, even though many progressives don’t seem to realize it. The SALT deduction is the part of the federal tax code that allows you to deduct state and local taxes when calculating your federal tax bill. Critics argue that the benefits go mainly to wealthy and very wealthy people. And that is true as far as it goes. But that’s going to be true in almost any revision of graduated income taxes. The key is that in many blue states it hits a lot of middle and upper middle class families too.
Now, boohoo for them right? Well, if it’s them versus subsidizing people’s out of control insulin costs, sure. But it’s not. That’s not the trade off. Here we get to the myopia of progressive opposition to or lack of support for SALT deductions. The SALT deduction was originally gutted in the 2017 Trump tax cut bill. That was done in part to make up revenue lost by giving huge tax cuts to the extremely wealthy. But that wasn’t the main reason. The authors of the bill correctly believed that gutting the SALT tax was a direct attack on the (mostly) blue states with high-tax/high-service governance. We all know that some states put more into health care, unemployment insurance, education, social services than others — all the basic stuff mostly or partly paid for at the state level. That high-tax/high service model is what’s behind that. States that follow the low-tax/low-service model not only have fewer benefits. They also rely more on federal subsidies to provide what services and benefits they do provide. Which is to say that, in most cases, they rely on transfers from blue states to red states to cover part of the bill for their already stingy social safety nets.