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Quackery and Bluster Define SALT Lawsuit

September 5, 2018 in Economics

By Reilly Stephens

Reilly Stephens

In August, the Treasury Department issued new regulations
addressing the gimmicks various states concocted to dodge a new
$10,000 cap on the state and local tax deduction (pun inducingly
known as SALT). Blue-state politicians such as New Jersey Gov. Phil
Murphy decried “[the
president’s] unfair and arbitrary tax hike on working and
middle class families” (just how many working-class families
in New Jersey pay more than $10,000 a year in state taxes remains
unclear). This rhetoric also comes with a lawsuit, which was filed
in July by New York, New Jersey, Maryland, and Connecticut, and
claims that capping the deduction is not simply a policy
disfavorable to those state’s citizens but an
unconstitutional attack on federalism itself.

While one can debate the policy merits of the cap, and the
tax-reform legislation as a whole, the contention that it offends
any constitutional principle whatsoever should be consigned to the
dustbin of quackery and bluster.

Explaining tax policy without the reader falling asleep is more
or less the Kobayashi Maru of op-ed writing, but I’ve never
believed in no-win scenarios. The gist is this: Until the recent
tax bill, state taxes were deductible from your federal income tax.
That is, if you made $100,000 a year, and your state tax obligation
was $20,000, for purposes of federal income tax you only had an
income of $80,000 dollars. This was an effective subsidy for
high-tax states — they could raise taxes on their citizens at
a discount since the increased state taxes paid would be
compensated by a decrease in federal liability.

While one can debate the
policy merits of the cap, and the tax-reform legislation as a
whole, the contention that it offends any constitutional principle
whatsoever should be consigned to the dustbin of quackery and
bluster.

Last December’s tax bill limited this free ride. The
deduction is capped at $10,000 (for couples), and so in our example
the feds will tax you on $90,000 worth of your income. Citizens of
high-tax states will now more fully feel the brunt of both state
and federal regimes. Low-tax states perhaps gained some solace from
the remedy of this inequality, but their relief was no match for
the high-tax states’ indignation.

Saddled with the horror of their citizens actually noticing how
much they were paying in taxes, the high-tax states decided to sue.
Their claim, such as it is, is that decreasing the cushion
protecting state taxes limits their “sovereign
authority” to tax their citizens into penury. They also point
out that the high-tax states are mostly blue and the low tax states
mostly red. Therefore, limiting the state and …read more

Source: OP-EDS

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