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If you live in Florida or another low tax state, pretend to be yourself. A bipartisan group of Blue States lawmakers is preparing to punish your state's financial detention. They want to raise the upper limit of federal income tax credits for state and local taxes known as salt.
If they succeed, middle-class Americans in the Red State will need to re-subsidize wealthy taxpayers in states like California and New York.
Before President Trump's 2017 tax reform, the salt deductions paid off the same federal benefits, relying on high-tax wealthy residents by reducing federal taxes.
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This is the transfer of hidden wealth from wealthy workers in low-tax states who do not receive deductions and need to pay more in federal taxes.
Keeping the deduction at $10,000 was an ingenious way to deal with that fraud. It has made wealthy residents of high taxes feel the pain of actual tax debt while protecting middle class households.
Coupled with the burdensome covid lockdown, exposure to the reality of excessive taxation in the state has led to mass migration. Since then, Florida has gained over a million new residents, while California and New York have each lost one million.
Currently, both parties' blue state lawmakers are threatening to blow up President Trump's tax cuts. This will expire unless the salt deduction is revived or significantly expanded this year. That would be a terrible mistake.
Raising the salt cap benefits primarily wealthy people, not middle class, but households that make more than $200,000. Middle class families who use the standard deduction almost always do not earn cents now.
Who will pay the bill for this gift to wealthy taxpayers? Everyone else. Increasing salt deductions will either force a majority of higher taxes or create a budget shortage that will result in a larger inflation deficit. In short, middle-class families across the country will bear the cost of recovering abusive salt deductions.
Worse, salt deductions undermine competitive federalism. This is the very foundation of our constitutional arrangements. The genius of the original federal structure of the Constitution existed before the transformation of progressive and new deals a century ago, and was forced by the state to compete for its residents and capital by keeping taxes low and minimizing regulations.
Government-obsessed progressives denote it as a “race to the bottom.” They have consistently hampered interstate competition, particularly after significantly increasing the tax power of Congress in 1913. In the 1920s, they united in Congress to enact federal real estate taxes, allowing state property tax liability to be deducted from federal taxes.
The scheme previously abolished its property tax to become a national retirement shelter, particularly as it targeted Florida. It took away selected retirees between high and low tax conditions. From now on, their choices are between paying high real estate taxes in the state or paying them to the federal government.
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Florida sued, arguing that the scheme amounted to federal taxes in some states, but not others. Alas, the increasingly progressive Supreme Court rejected the claim in Florida v. Mellon (1927).
Salt advocates in California, New York, New Jersey and Illinois today complain about “double taxation,” but it routinely makes their components double and triple taxes. Their real dissatisfaction? Trump's saltcaps made high taxes transparent to everyone and cost politically.
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Florida is in a position to lose a lot from the push to recover the salt deduction. It erodes the state's competitive advantage, is forced to subsidize financially elsewhere, and punishes Floridians for the state's successful pro-post policies.
Salt deductions are not just for the welfare of the wealthy. This is a plan to spread tax misfortunes in blue states across the country. Congress should consider abolishing it altogether, rather than restoring it to benefit the wealthiest.
