While Washington is claiming victory, states are crying foul.
Late last week, the U.S. Senate passed its version of the tax reform package that cleared the House a few weeks earlier. Within the hundreds of pages of legislative language in each bill lay a number of provisions that have significant impact on state governments, including modifications to the state and local tax deduction.
Under current tax law, individuals who choose to itemize and deduct eligible expenses on their federal tax return are able to deduct state and local income, sales and property taxes. Both the House and Senate bills eliminate the so-called “SALT deduction” for state and local taxes while capping the property tax deduction at US$10,000.
As a former Ohio state senator, I served on the Senate Ways and Means Committee for a number of years. I also went through five state budget cycles over 10 years. Because of that experience, I believe the federal changes to the SALT deductions will be detrimental to American families and have long-term negative impacts on balancing state budgets.
An uncertain future
I am not alone in my concern.
The bipartisan National Conference of State Legislators issued a scathing statement on the proposed changes to the SALT deduction. The organization’s president, South Dakota State Senator Deb Peters, a Republican, expressed her opposition by saying, “SALT is one of the six original federal tax deductions and has been a staple of the federal tax code and the state-federal fiscal relationship for over 100 years. We will continue to fight for the more than 43 million Americans who claim this deduction every year.”
State lawmakers have reason to be worried, as most state budgets rely on state income and sales tax as primary revenue streams for their operating budgets. According to the center left think tank Center for Budget and Policy Priorities, eliminating the SALT deduction could place strain on funding needed for critical programs and services provided at the state level such as education and infrastructure. Cities and towns usually benefit from property taxes. So the fact that the tax plan caps – rather than eliminates – the property tax deduction could help insulate local governments for now.