There is almost no limit to the bad policy included in the new GOP tax law. Indeed, even within ‘bad policy’ which can distinguish between ‘bad policy’ in the sense of conservative public policy which I and likely many readers think will have bad outcomes and ‘bad policy’ in the sense of poorly constructed tax law which almost no one would devise if they had time and weren’t so focused on giveaways to major donors. Of all these however I continue to believe that the (near total) end of deductions for SALT taxes are likely to have the greatest political impact. They are also stimulating a new debate about the distribution of resources within the US federal system.
Let’s rehearse some details.
‘SALT’ refers to state and local taxes which have been deductible against your federal income tax burden. Starting in 2018 that deduction will be capped at $10,000. The impact of this will vary dramatically depending on where you live, how much money you make and how you spend that money. But the big picture is that it will have the biggest impact in high tax states and particularly on individuals who live in high tax states, are affluent enough to have a relatively high state income and property tax burden but are yet not so wealthy that they get the big benefits from the corporate and federal income tax reductions in the tax bill.
From a macro perspective, the SALT change means that the higher tax states (mainly but not exclusively blue states) will be sending a lot more money to the federal government. This is on top of the fact that blue/high tax states already send much more money in taxes to the federal government than they receive back in services, grants, general spending, etc. There are significant exceptions. But by and large federal taxing and spending policy draws money from the blue states and reallocates it into the red states. Indeed, a state like Louisiana, for instance, is able to keep its taxes low not simply because it has less expansive government services but also because it funds state government with a substantial infusion of federal subsidy. The new bill will intensify this existing pattern.
This is all by design. This policy is intended to punish states that tend to vote Democratic. The more high-minded explanation of the motivation is that it gives an incentive to lower state taxes. Generic punishment is probably the better way to look at it.
In any case, here’s why I think this is likely to be the most politically consequential part of the bill. We talk about “blue” states and “red” states. But blue states still have lots of Republican representatives in the House. Meanwhile, the greatest bleed Republicans have seen so far this year is in affluent and educated suburbs that tend to be mixed or vote Republican. It’s precisely in those parts of blue states (and some red states too) where the SALT change is likely to be felt most keenly. Again, we’re talking about the merely affluent or even rich but not super-rich.
One counter-argument is that some of these people may come out break-even since they may get tax breaks from other parts of the bill or if they’re really wealthy, the reduction in the highest marginal tax rate. Maybe. But I’m not sure that’s how it plays out in practice though. Say you’re a doctor or lawyer in New Jersey or Pennsylvania who makes well into 6 figures a year. You get a nice tax break from the GOP tax law but it’s largely balanced out by the end of the SALT deductions. Are you likely to say well, I’m still marginally ahead so I think this is great? I don’t think so. Especially, if you’re inclined to see the larger political environment in a negative light. That usually means you’re looking for ways you were treated unfairly.
As we’ve seen in many different sections of the country in 2017 these voters are already increasingly hostile to President Trump and the GOP. In that context, if you see that your equally affluent sister-in-law in Florida got a big tax cut and you didn’t, I think you’re likely to see that in a pretty negative light. It’s quite simply not fair that you’re getting punished for living in the wrong state. It’s certainly something that a Democratic candidate looking to peal away soft GOP voters in the suburbs can make hay of. “Trump and his friends decided to give themselves a massive tax cut and funded it with a tax hike on you. You just live in a state they don’t care about.”
One confusion about the politics of this part of the law is being clear on just what we’re talking about. Is this the worst part of the law? Definitely not. Are the people hit by it the ones struggling the most in this economy? Not remotely. But politics is about elections and elections are zero-sum games. What counts politically are cross-cutting effects – events and policies likely to move people from one column into another. That is what I think this does. It provides a big cudgel to Democratic candidates trying to unseat Republican incumbents in reddish parts of high tax blue states. That’s because of simple math that I believe many will see on their tax returns. It’s also because this slice of the electorate was hemorrhaging from the GOP even before this law got passed. We need to remember. Perceptions are not simply about objective facts. They are also about the prism you see them through. For these voters, it’s already a negative prism for Trump and the GOP.