Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Cooper's The State Death Tax Credit And The SALT Deduction

This week, David Elkins (Netanya) reviews Jeffrey A. Cooper (Quinnipiac), Red States, Blue States: Lessons from the State Death Tax Credit and the “SALT” Deduction, 73 Tax Law. __ (2020) (forthcoming).

One of the more politically contentious provisions of the 2017 Tax Cuts and Jobs Act is the capping of the deduction for state and local taxes (SALT) at $10,000 per married couple. Opponents of the change have argued that it was designed to punish those states that voted for Hillary Clinton in the 2016 presidential elections. In an attempt to reverse the legislation, the leaders of four of these states have sued the federal government. Proponents claim that the cap is necessary to prevent high-tax states from imposing the costs of their expensive programs on the federal government and, indirectly, on residents of low-tax states.

In a timely article, Professor Cooper places the issue in historical context by comparing the SALT deduction to the federal estate tax state death tax credit that was established in 1924 and repealed in 2001. He posits that viewing the 2017 legislation within the broader historical context reveals trends and patterns, providing greater insight than would a study of the SALT deduction in isolation. He considers not only the rhetoric surrounding the various legislative changes but also how states responded to the adoption and then to the repeat of the state death tax credit and examines whether such behavior might be a harbinger of state reaction to the SALT deduction cap.

She describes double taxation as a red herring and, drawing on the work of Professor Daniel Shaviro and others, argues that the important consideration is not the number of jurisdictions that impose tax, but rather the overall tax burden. According to this theory, it is only when the choice of investment venue does not affect the overall tax burden that global resources will be used efficiently. My own position is that neutralizing the effect of taxation on international investment, if it could be achieved, would in fact misallocate resources to the detriment of aggregate global welfare. Taxes and subsidies are the mechanisms whereby potential host countries signal to the market the expected costs and benefits of hosting foreign investment. The effect of the investment on the lives of residents of the host country is a crucial element in the global social welfare function. By not permitting tax differentials to play a role in international investment decisions, capital export neutrality would prevent the market from taking into account the impact of international investment on the welfare of the host country’s residents and would inhibit the directing of resources to their most efficient uses.

One particularly fascinating part of the article concerns the debate surrounding the adopting of the state death tax credit in 1924. Florida had designed a lenient tax regime in the hope of attracting and retaining wealthy citizens. However, along with the rest of the South, it had voted for losing Democratic presidential candidates in both the 1920 and 1924 election. As described by Professor Cooper, lawmakers from the Northern states viewed Florida as a threat. Consequently, Congress enacted the state death tax credit for the primary purpose of negating Florida’s ability to attract wealthy residents via its favorable estate tax policy. The dollar-for-dollar credit meant that individuals would have no economic incentive to relocate from states with high estate taxes to states, such as Florida, with no estate tax. Opponents of the credit decried the attempt to meddle in the domestic affairs of the individual states. Anticipating a similar action 75 years later by the governors of states opposed to capping of the SALT deduction, the governor of Florida sued the federal government. Intriguingly, the rhetoric relied upon by those opposed to the granting of a credit for state taxes in 1924 is strikingly similar to that employed by those opposed to the capping of a deduction for state taxes today.

The reactions of the individual states to the adoption and then to the repeal of the state death credit were predictable. Following the adoption of the credit, every state modified its estate tax to take full advantage of the death tax credit. Of course, any other course of action would have been irrational: the death tax credit effectively permitted states to raise revenue at no cost to their own residents. In fact, in many states the provisions of the estate tax were explicitly linked to the credit. Following the repeal of the credit and its replacement with a deduction, most states reversed course. By 2018, only 18 jurisdictions imposed an estate tax.

Professor Cooper notes that the capping of the SALT deduction has had a far less dramatic impact on state taxation than did the repeal of the state death tax credit and reasonably attributes this non-development to the difference between a credit and a deduction. A credit reduces one’s federal tax liability by $1 for every $1 paid to the state. As a result, the cost of paying state taxes is essentially zero.  By contrast, a deduction reduces one’s federal tax liability by $1 times the taxpayer’s marginal tax rate for every $1 paid to the state. In other words, even with a full deduction in place, most of the revenue collected by the state will come out of the pockets of its own residents. Because a deduction offers significantly less benefit to taxpayers than does a credit, the capping of a deduction will affect state tax policies considerably less than does the granting or the repeal of a credit. Nevertheless, the capping of the SALT deduction does increase the economic burden of SALT to those who pay them. How much this will affect the willingness of residents of the various states to bear relatively high tax burdens and how much affect it will have on interstate competition for residents – and the two are not unrelated – is at this point not entirely clear.

In an era of intense partisanship and angry and disrespectful political discourse (as described by the author toward the end of his article), it is sobering to consider current issues in the light of a broader historical context.

Here’s the rest of this week’s SSRN Tax Roundup:

• Emily Cauble (DePaul), Presumptions of Tax Motivation, 105 Iowa L. Rev. __ (2020) (forthcoming)
• Hasmik Hmayakyan (Student, Loyola Los Angeles), Taxation in the Cyber Age: The Future of Wayfair, 39 Loy. L.A. Ent. L. Rev. 285 (2019)
• Zachary King (Wisconsin), Dan Lynch (Wisconsin), Bridget Stomberg (Indiana) & Steven Utke (Connecticut), Does the Financial Reporting for Income Tax Expense Affect Financial Reporting Quality? Evidence from the Timeliness of Goodwill Impairments (2019)
• Peter Koerver Schmidt (Copenhagen), Abuse and Avoidance – A Contemporary Analysis of Danish Tax Law, 4 Eur. & Int’l J. Tax L. 489 (2018)
• Ajay K. Mehrotra (Northwestern), “Life in All Its Fullness”: Cardozo, Fellows, and the Critical Context of Welch v. Helvering, 151 Pitt. Tax Rev. 15 (2019)
• Noam Noked (Chinese University of Hong Kong), Should the United States Adopt CRS?, 118 Mich. L. Rev. 118 (2019)
• Leopoldo Parada (Turin), How the Vodafone Magyarország Opinion Affects EU Debate on Turnover-Based Digital Taxes, 95 Tax Notes Int’l 399 (July 29, 2019)
• Tracy M. Roberts (Samford), Greenbacks for the Green New Deal, __ Pitt. Tax Rev. __ (2019) (forthcoming)
• Julie Roin (Chicago), The Case For (and Against) Surrogate Taxation (2019)
• Hannah Shearer (Giffords Law Center) & Allison Anderman (Giffords Law Center), Analyzing Gun-Violence-Prevention Taxes Under Emerging Firearm Fee Jurisprudence, 43 S. Ill. U. L. J. 157 (2018)
• Patrick J. Smith (Ivins, Phillips & Barker), Pre-Enforcement Challenges and the Anti-Injunction Act, 159 Tax Notes 1001 (May 14, 2018)
• Dario Stevanato (Trieste), Taxes as Motivators and Predictors of Company Restructuring (2018)
• Mary Viswanathan (Hastings), Lower-Income Tax Planning, __ U. Ill. L Rev. __ (2019) (forthcoming)
• Jingyi Wang (Peking) & Wilson Chow (Hong Kong), Capital Gains Tax with Hong Kong Characteristics: Desirability, Feasibility and Design, 48 Hong Kong L.J. 555 (2018)