Today, the controversy over SALT. And by SALT, I mean State and Local Taxes. SALT. Right now there is an epic battle going on between the federal government and states like California, New York and New Jersey. It centers on whether taxpayers in those states should get a bigger break on their federal taxes because they pay so much in state and local taxes.
On December 22, 2017, President Trump signed into law The Tax Cuts and Jobs Act to simplify tax filings for millions and give most Americans a tax cut.
But there’s one part of the law that’s pitting high tax states against the federal government. The part that slapped a limit on how much in state and local taxes, known as SALT, Americans can deduct from their income.
Sharyl (on-camera): Nowhere is the fight over high state and local taxes more heated than here in California. The state sales tax is 7.25%. State income tax tops 13%. Add in local taxes and the total state and local tax rate for many residents above 23%.
Before the limit on SALT deductions, a wage earner making $100,000 a year could subtract what he’d paid in state and local taxes, say: $23,000 in a high tax state and pay federal taxes only on what’s left: $77,000. Now, the same person can only deduct $10,000 and owes federal taxes on $90,000 of income. In other words, his total federal tax bill may be several thousand dollars more. It makes sense for California State Senator John Moorlach, a Republican, to explain a little more, he trained as a certified public accountant.
John Moorlach: So when you remove the ability to deduct state and local taxes up to just $10,000, that has a pretty big, significant consequence on your federal income tax returns. But that is the joys of living in a high tax state.
Sharyl: Do you support the federal government being pressed to increase the limits on those deductions for these high tax states? Or do you think the state should just deal with it themselves?
Moorlach: I haven't been a crusader to change anything. I think we tax really high. California has the highest personal income tax rates. It has the highest gas tax rates. It has the highest sales tax rate. I mean, we've got another tax measure on the ballot trying to raise our taxes again. So, we have incredible weather here. We pay a steep price for it.
But many Californians are not so agnostic on the SALT debate.
Sharyl: Can you explain to people that don't live in a high tax state, how much the taxes are in California?
John Yoo: Oh, they're incredible. I pay probably in total, federal and state taxes together, probably more than 50% of my income.
John Yoo is a visiting scholar at the free enterprise think tank, American Enterprise Institute. A California resident, he pays more in federal taxes now that the SALT deduction is capped. But he says that’s how it should be.
Yoo: What the SALT deduction did, and I don't agree with it, but what it did is that it muted the effects of living in a high tax state. So if I lived in California, or you lived in New York City, you pay really high taxes, but because of that deduction, it didn't feel so bad. You effectively, you got a one-third off your taxes. It's as if you said to your kids, "Hey. Here's a credit card for everybody. Go all the way up to the credit limit." and then, right, you say to the kids who didn't spend much, "I'm going to take money away from you. And I'm going to give it to your brothers and sisters who maxed out their credit cards." That's not fair. It doesn't make sense.
On the other side, California state senator Holly Mitchell, a Democrat.
State Senator Holly Mitchell: You know, the challenge is that there's this middle group of Californians that earn between $100 and $250 thousand a year who are really getting hit. Over of the 1 million people impacted by SALT in California, that income group constitutes about 600,000.
Sharyl: Can you describe the impact financially on an average person?
Sen. Mitchell: Yes. There was a wonderful article written in CalMatters. It really talked about a family in my own district in Inglewood, California. And so that hit, thanks to SALT, thanks to their inability to deduct local taxes against their federal taxes, hit them in a range of $5,000 to $7,000 in that first year. The people who leave California are those who can't afford literally to stay here anymore. So I’m concerned about that middle-income group who tend to be the small business owners and those who employ others in a significant way. That's the group we have to protect, the middle-income earners.
There’s a wrinkle, not all Democrats are on the same page when it comes to SALT. That’s because going back to no limit on state and local tax deductions would benefit the rich the most.
In California, the wealthiest 1% would save nearly $80,000 a year each. But sixty percent of residents would only save 10 bucks or nothing at all.
Mitchell says one compromise would be not to do away with the cap altogether, but raise it from $10,000 to $20,000.
Meantime, national lawmakers from other high tax states like New York have joined Californians in pressing for change.
Congressman Tom Suozzi, a New York Democrat, sparred with Treasury Secretary Steve Mnuchin at a hearing last March.
(March 3, 2020 Congressional hearing)
Rep. Tom Suozzi: Mr. Secretary, are you aware that many people are leaving New York state and other states because of the high taxes that they pay in those states that are no longer deductible at the federal level?
Treasury Secretary Steve Mnuchin: I am and I think that's quite unfortunate. I think that some of those high tax states, including New York and California, should think about lowering their taxes.
Suozzi: Well, i know that you want to take the long arm of the federal government and reach into the state and local governments and tell them what to do.
Mnuchin: I don't want to take the long arm of government.
Suozzi: Well, you're saying that they should change their policies. So, that's up to the state and local governments to do that. But, I'm just asking you, if wealthy people and other people leave these states to go to places like Florida and South Carolina, North Carolina, and Arizona and other places, who picks up the burden for those taxes?
Mnuchin: Obviously, the rest of the people who are there.
In July, during the coronavirus crisis, the SALT debate hit a fever pitch. Democrats tried to lift the SALT deduction limit as part of coronavirus relief. That didn’t work.
But the Senate’s lead Democrat Chuck Schumer of New York promised he’ll get it done if his party takes control of the Senate.
Senator Chuck Schumer (July 14, 2020): If I become majority leader one of the first things we will do is eliminate it forever. It will be dead, gone and buried.
Back in California, Yoo takes that promise with a grain of salt, opens his wallet, and pays up.
John Yoo: Me and my neighbors, we voted for the governor. We voted for this assembly and the state senate. They keep piling on the taxes. They've made terrible financial decisions. It's not the federal government's job to protect California from the consequences of its own bad decisions.
Sharyl (on camera): A legal challenge by New York, New Jersey, Connecticut and Maryland is making its way through the courts.