One of the more controversial features of the tax reform bill two years ago was the proposal to cap the deductibility of state and local taxes (SALT). This deduction is a benefit given to taxpayers, but it provided much more benefit to taxpayers who lived in high-tax states. They were able to deduct more from their taxes.
During the debate, there was great pressure on the Congress and the Trump Administration to drop the idea of capping this deduction. However, the bill passed with this provision. The state of New York then filed a lawsuit. Earlier this month, a federal court ruled against the New York lawsuit. The court wisely ruled that Congress does have the power to tax and design the tax code.
Capping deductibility of state and local taxes (SALT) makes sense. For years, taxpayers in low-tax states have been subsidizing taxpayers in high-tax states who were able to deduct more from their federal taxes. Because of this benefit, most of these taxpayers probably paid less attention to the number of taxes being imposed by their legislature. Changing the deductibility will not only be fair to taxpayers in low-tax states but it might also encourage action from taxpayers in high-tax states.
This debate about the deductibility of state and local taxes raises another question. Why have this provision in the tax code in the first place? You could argue that we don’t want to double tax people, but the federal government shouldn’t care what your state and local governments tax. Your federal income tax supports the federal government. If you want lower state and local taxes take it up with your state and local legislators.
You might consider this cap on deductibility as the first step in the direction of a simpler tax code with fewer deductions. Let’s keep moving in this direction.