The “Tax Cuts and Jobs Act” (TCJA) was signed into law on Dec. 22, 2017. The Act reformed the U.S. corporate income tax code cutting the rate to a globally competitive 21%. Reforms on the personal income tax side, which are scheduled to expire in 2025, reduced the marginal income tax rate for most tax brackets. The TCJA also raised the standard deduction and reformed specific exemptions and deductions, which included capping the value of the state and local tax (SALT) deduction at $10,000.
The SALT deduction creates concentrated benefits for a small group of people while imposing costs that exceed these benefits on all others. Such a scheme exemplifies the special interest loopholes that pervade the U.S. tax code and are currently diminishing the economic growth potential of the U.S. economy. While far from the ideal, the TCJA demonstrated that tax reforms are possible that will close special interest loopholes and lower marginal income tax rates. As discussed in the Pacific Research Institute’s Beyond the New Normal research program, tax reforms that remove special interest loopholes and establish broad-based (ideally flat) taxes accelerate economic growth and promote broad-based economic prosperity.
It is important to document the net benefits from capping the SALT deduction because the cap is set to expire and may even end sooner due to active efforts to either raise the cap or eliminate it all together. For example, H.R. 1757 was introduced on March 14, 2019, by Rep.
Lauren Underwood (D-Ill.). H.R. 1757 would raise the SALT deduction cap from $10,000 to $15,000, $30,000 for married couples filing jointly; and would adjust these caps annually for inflation. On Feb. 11, 2019, Rep. Bill Pascrell (D-N.J.) introduced H.R. 1142, which would repeal the cap all together and raise the top tax rate back up to 39.6%. Reps. Nita Lowey (D-N.Y.) and Peter King (R-N.Y.) have also introduced the “Securing Access to Lower Taxes by Ensuring Deductibility Act of 2019” that would “fully restore” the SALT deduction.
In light of these efforts, the purpose of this analysis is to review the adverse impact of the SALT deduction and demonstrate the benefits from reforms (like the TCJA) that limit the deduction in order to implement broad-based marginal tax rate reductions.
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Wayne Winegarden is the Pacific Research Institute’s senior fellow in business and economics as well as director of PRI’s Center for Medical Economics and Innovation. He is also the Principal of Capitol Economic Advisors.