Despite holding a trifecta during the 115th Congress, Republicans – in the words of political scientist Sarah Binder – ”struggled to legislate” between 2017 and 2019. Among the few significant policies they were able to enact was the Tax Cuts and Jobs Act, the largest adjustment to the tax code since 1986. The law reduced tax rates for businesses and individuals, increased the standard deduction, doubled the estate tax exemption, and eliminated the enforcement mechanism for failing to get a healthcare plan under the Affordable Care Act. Maybe not most controversially, but most politically salient, the law also capped the state and local tax deduction at $10,000.

It is this element, the cap on the state and local tax (SALT) deduction, that is the most misunderstood. Aside from the many other elements in this 186-page piece of legislation (many of which are generally criticized by economists), the SALT cap is also one of the best things that the 115th Congress and President Trump did.

What is the State and Local Tax Deduction?

When the income tax was permanently established in America in 1913, Congress’ legislation included a deduction for other taxes – among them, state and local taxes. Various iterations of the deduction have been in place ever since, but the concept appeared in its modern form with the introduction of the standard deduction in the 1940s. The SALT deduction allows taxpayers who itemize their personal deductions on the federal taxes to deduct what taxes they pay to their state and local governments from their adjusted gross income. 

When reporting their adjusted gross income – which is the actual income amount your taxes are calculated based on (so it is in your interest to lower this number as much as possible) – many taxpayers can deduct items like student loan interest, some alimony payments, retirement contributions, and state and local taxes. To illustrate this, imagine a federal taxpayer who has an income of $100,000, but pays about $5,000 in property taxes and state income taxes, thereby reducing their adjusted gross income. Our imaginary federal taxpayer who deducts nothing but the property and state income taxes will have an adjusted gross income of $95,000, owing less money in taxes than if they owed based on their full unadjusted income.

The SALT deduction doesn’t include some local taxes like those on vehicle inspections, gasoline, and property improvements, but in a high tax state, they can amount to a sizable reduction in the adjusted gross income of a federal taxpayer. Nine states have no functional state income tax (though they may still have local taxes),1Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire technically has a state income tax on dividends and interest and Washington similarly taxes capital gains income, so we’ve included them in the nine. a number of states have a “flat” income tax (for example, Illinois and North Carolina state income tax payers simply pay around 5% to the state), and the majority have a graduated-rate income tax (like the federal government). No state’s income taxes are higher than the top federal bracket’s rate of 37%, but California (13.3%), Hawaii (11%), New York (10.9%), New Jersey (10.75%), and the District of Columbia (10.75%) round out the five with the highest state tax brackets (they all have a graduated-rate system). This means the SALT deduction disproportionately benefits high earners in these states, which starts to hint at both the policy and political problems of the SALT deduction.

Why is the SALT Deduction Bad Policy?

There are a few common criticisms of the SALT deduction across the political spectrum but they all center around the fact that it disproportionately benefits higher-income taxpayers. Imagine that there was no SALT deduction cap: a Minnesota earner making $250,000 per year would be able to deduct about $20,000 in state income taxes (ignoring local taxes) from their federal gross adjusted income, reducing their tax obligation by about $7,000. But a Minnesota earner making $40,000 per year would only be able to deduct about $2,300, reducing their federal tax obligation by about $270. The Joint Committee on Taxation found that, before the $10,000 cap, about 88% of the benefit of the SALT deduction went to those with incomes over $100,000 while only 1% went to those making less than $50,000. 

Once you consider that this includes property taxes, you can start to see how this is even more regressive than the prior example shows. Of those in the bottom income quartile (those making less than approximately $35,000), fewer than 40% own their home; of those in the top income quartile (those making more than $120,000), almost 90% own. Income and home ownership also cut across racial, marital, and age lines. Non-Hispanic whites make up 75% of homeowners but only 52% of renters. Most homeowners are over the age of 55. Married-couple families make up almost 60% of all homeowners, and those who live by themselves make up 38% of renters. Asians have a median household income of around $101,000 and non-Hispanic whites around $80,000, compared to around $58,000 for Hispanics and around $48,000 for Blacks.

A second problem with the SALT deduction is that any deduction necessarily means less money flowing into the federal government. From a budgetary standpoint, the SALT deduction is nonsense. Eliminating the deduction would increase federal revenue by nearly $1.3 trillion over ten years. And remember, that is almost entirely coming from the highest income Americans. In 2021, when Democrats sought to roll back the $10,000 cap passed by Republicans seven years prior and increase it to $80,000, it was estimated that this would cost the federal government around $275 billion in just five years. This proposal alone was among the most expensive in the “Build Back Better Act” that Democrats ultimately failed to pass due to concerns about overspending and inflation.

Another policy critique falls less along economic lines and more along philosophical ones, but is nonetheless worth noting. Doesn’t federalism work best with a neutral federal government with states that pick and choose their own policy priorities? States with higher tax burdens should be providing better – or more – government services (though this is not actually often the case in reality). A better way to put this is it’s not like the citizens of states with low income taxes don’t ultimately pay somehow. Nevada and Texas, which don’t have an income tax, both have high sales taxes, for example. New Hampshire – despite having no income tax – has the third-highest property tax burden. In order to function, each state has to make up the difference somehow – either with reduced services, higher taxes of other kinds, or federal funds redistributed from more well-off states.

This criticism is a moral one, to be sure, and a truly neutral federal government is an oxymoron as old as the foundation of the United States. But there is a logic here that should appeal to small government conservatives and libertarians. Combine this with the economic and budgetary critiques and the SALT deduction amounts to a write-off that disproportionately benefits high earners in high tax states like California, Hawaii, Minnesota, New York, New Jersey… and Connecticut, and DC, and Vermont… and you just figured out the backwards politics of it, didn’t you?

Why is it Bad Politics?

Well ignoring for a minute the prospect that bad policy should be bad politics in and of itself, let’s get into the obvious. To be clear, the SALT deduction is a tax cut that disproportionately benefits the wealthiest Americans – especially those in the states with the highest tax rates. That explains why it is about as close to trickle-down economics as members of the Democratic Party are willing to publicly endorse. And it also explains why Republicans – who represent very few voters in these high tax states – suddenly wanted to go on the record in favor of a tax raise, a blow to party orthodoxy nearly 40 years in the making.

Prominent Democratic supporters of the SALT deduction tend to represent the wealthiest Democratic constituencies in the country, and they often tend to be moderates. Prominent proponents include former New York Representative Tom Suozzi, who represented his state’s fourth congressional district in northern Long Island (the fourth most affluent congressional district in the country, now represented by Republican George Santos); New Jersey representatives Josh Gottheimer and Mikie Sherrill, both of whom represent affluent suburbs of New York City (the 17th and eighth most affluent districts, respectively); New York Senator Chuck Schumer (representing the third most affluent state); then-New York Governor Andrew Cuomo (who sued the federal government in a case that the federal district court dismissed); and now-former New Jersey Representative Tom Malinowski, who also represented a New York City suburb in the seventh most affluent district in the country and lost reelection in 2022 in a race heavily focused on the SALT deduction. 

That Schumer, the Senate Democratic leader, and the Democrats’ then-speaker, Nancy Pelosi (from California, representing the 10th wealthiest district in the country) both sought to ease the Republican cap makes sense politically – they come from high tax states, many of their caucus members were agitating for it, and a tax cut seemed convenient in what was going to be a massive spending increase. These Democrats wanted to bail out their (rich) voters from what they perceived as an unfair attack by Republicans that sought to punish the high tax blue states.  

But not all Democrats support the deduction. In contrast to other blue state moderates, Colorado Senator Michael Bennet called the proposed cap increase “preposterous”; President Joe Biden was never really sold on the idea; and Vermont Senator Bernie Sanders ardently called out the pro-SALT Democrats’ hypocrisy. The inter-party divide meant the Democrats were weaker on the issue than they should have been when it came to undoing a signature fiscal accomplishment of Trump and the Republicans. Because of a lack of internal consensus, economic concerns, and the poor political optics (Senate Republican Leader Mitch McConnell dinged Democrats for their proposed “bonanza for blue-state millionaires and billionaires”), a change to the cap never made it into the Inflation Reduction Act of 2022, the doomed Build Back Better Act’s legislative successor.

Democrats have spent a lot of political capital since the Clinton administration in an attempt to come off as the fiscally responsible, pragmatic, and altruistic party – eschewing the “tax and spend” disparagement the party was (fairly, in that it is what they did in terms of both raising taxes and spending more) pinned with during the New Deal and Great Society eras. Clinton’s strategic pivot towards balanced budgets, free trade, and welfare reform (and his declaration that “the era of big government is over”) marked a notable inflection point. But Republican overspending in the 21st century and the party’s increased willingness to weaponize the economy (recall it was actually House Democrats who rallied in 2008 to support President Bush’s fiscal relief plan at the height of the financial crisis, as the president’s own party bucked the plan) and the nation’s fiscal situation (recall the debt ceiling crises instigated by Republicans under President Obama) forfeited much of their fiscal credibility by the time 2012 rolled around.

The relatively mundane 2012 election marked the ultimate manifestation of this decades-long effort by Democrats and the shirking of fiscal responsibility by Republicans. At the time of the election, 75% of voters believed the economy was in a bad condition – and this was after four years of a Democrat in the White House. But Mitt Romney, Obama’s Republican opponent, was the antithesis of the economic everyman. Unlike many Republicans in Congress, Romney was not a fiscal zealot who was willing to destroy the economy to achieve debt reduction, but he was a compelling foil for Democrats on an issue they’d long struggled with: the economy. 52% of voters believed Romney’s policies favored the wealthy, but only 9% felt the same about Obama.

And after Trump threw the unsaid (but well documented) hypocrisy of his party’s economic claims out the window by running as a big government Republican, it really did seem like Democrats had finally wrestled the economic message of responsible spending and pragmatic pro-business policies from the Republican Party. The historically conservative-aligned Chamber of Commerce began backing Democrats in droves as Trump became the domineering figure in the Republican Party and Democrats decisively nominated moderate candidates for president in 2016, Congress in 2018, and again for president in 2020 (instead of those from the Bernie Sanders wing of the party). Maybe, voters could reason, Democrats would continue to pursue larger government spending, but at least it would clearly benefit those who needed it. After all, why would any voter think that the party that spent decades arguing millionaires and billionaires don’t pay enough in taxes would create policy carve outs that disproportionately benefit the wealthy?

And that brings us back to why the SALT deduction is bad politics for the Democratic Party. It would be one thing if it were the right thing to do and benefited the country overall at the expense of some political capital (perhaps how anti-choice Republicans perceive their crusade to end abortion rights). But as we explored earlier, it is unjustifiable policy that is a net detriment to the country and is about as close to a bailout for the wealthy as can be written into law without mass outrage. 

That the SALT deduction issue is not well understood by the average voter has allowed it to fester as a legitimate rallying cry for a segment of the party, something that they were willing to torpedo the cornerstone of their president’s agenda if they did not get. When Trump, McConnell, and every other wealthy Republican can credibly point to Democrats making tax cuts for the rich a must-have component of any policy, Democrats have given up four decades worth of positive economic messaging.

Democrats don’t need to make a choice between being the party of the lower class, middle class, or the upper class, because their diverse coalition allows them to unite people across class lines. But, they are conceding a lot of ground when they dig in on the SALT deduction, and the attack ads write themselves as Republicans lean more into the pervasive populist anti-elite message they stumbled into during the rise of Trump. Better Democrats should acknowledge the SALT deduction is bad policy entirely, remove the cap completely, and keep the plausibility that they are not uniquely benefiting the millionaire class with a controversial tenet of their agenda.