Paul L. Caron

Monday, December 17, 2012

Sullivan: Why the SALT Deduction Is Always Under Attack

Tax Analysts Martin A. Sullivan (Tax Analysts), Why the SALT Deduction Is Always Under Attack, 137 Tax Notes 1267 (Dec. 17, 2012):

Martin A. Sullivan argues that policymakers shouldn't be so quick to curtail or eliminate the deduction for state and local taxes.

[T]he history of the 1986 act can still teach us about the next tax reform effort. Among the most relevant lessons is that among the big three itemized deductions—the mortgage interest deduction, the deductions for charitable contributions, and the deduction for state and local taxes — the last is by far the one Congress is most likely to cut. As shown in Figure 1, the deduction cost the government $62 billion in 2010, and a lot of that revenue is from upper-income households. That is an attractive pile of cash, especially if the mortgage interest and charitable deductions are off the table.

Figure 1. Distribution of Tax Benefits From the Deduction for State and Local Taxes in 2010 (from a total of $62.4 billion)


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Sullivan's reasoning is sound. He missed one important point: that local property taxes are typically redistributed to fund public education statewide, making these effectively state taxes with limited local benefit.

Some writers of the 1986 Tax Reform apparently intended the unindexed AMT to operate as a slow-motion repeal of the deduction for state and local taxes. Periodic adjustments to the AMT exemption, but not to the AMT brackets, have allowed this to occur.

Posted by: AMTbuff | Dec 17, 2012 4:28:57 AM

"...unindexed AMT to operate as a slow-motion repeal of the deduction for state and local taxes."

Yes, and a repeal of the personal exemptions, and a repeal of deductions for charitable giving, etc. ad nauseam.

And I do mean "ad nauseam".

Posted by: AMT_Non-Fan | Dec 17, 2012 9:44:50 AM

Charitable giving isn't deductible for AMT purposes? News to me.

Posted by: the real anon | Dec 17, 2012 12:16:29 PM

The deduction for SALT does what the charitable deduction only purports to do. In addition, it is mandatory and local government expenditures are subject to democratic processes. Accordingly, the case for the SALT deduction is much stronger than the case for the charitable deduction.

Posted by: Anonymous | Dec 17, 2012 12:49:31 PM

Anonymous: Why should taxpayers in low-tax states subsidize taxpayers in high-tax states??

Posted by: Elmer Stoup | Dec 18, 2012 7:10:01 AM