By Joseph Gerics, Ed.D.
Thinking about tax policy can be complicated. The first issue is fundamental philosophical differences. Some people emphasize maximizing economic growth because “a rising tide lifts all boats,” while others concerned about income inequality would sacrifice a degree of growth to achieve greater equity.
Second, tax policy influences behavior, and policy goals vary. For example, housing policies intended to promote home ownership will differ from those intended to reduce homelessness.
Perhaps most important, taxes hit us in the pocketbook. Few people enjoy paying taxes; most people consider their “fair share” of the tax burden to be somewhat less than they are now paying.
Let’s see if we can overcome these hurdles and analyze one piece of tax policy. Since the start of the federal income tax in 1913, Americans have taken deductions for State And Local Taxes (SALT) on their federal tax returns. This SALT deduction for local property taxes was justified in part as a means of promoting home ownership by reducing its net cost.
President Trump capped the SALT deduction at $10,000. Some viewed this change as punitive because it primarily impacted residents of high-service, high-tax states like Connecticut, Massachusetts and New York, which happen to vote Democratic. Opponents of President Trump’s SALT cap sometimes argue that not being able to deduct state and local taxes is “double taxation.”
Frankly, I just don’t get this argument, though it sounds pretty good if one’s point is just to lambaste any taxation as too high. Local and state taxes fund services the federal government does not provide, like recreation, libraries, and police and fire protection. Paying for these services is, of course, additional taxation—for additional services. But additional taxation, like gasoline taxes, real estate conveyance taxes and estate taxes, does not mean “double taxation.”
Senators and representatives from the Northeast are pressing President Biden to restore the full SALT deduction. Doing so would result in a federal tax decrease for Connecticut residents who currently pay more than $10,000 in state and local taxes. But this tax break would do more harm than good.
Let’s look at some examples. A Bridgeport home valued at $300,000 would have a property tax over $11,000, exceeding President Trump’s $10,000 SALT cap. This homeowner might support restoration of the full SALT deduction, since they would have an additional $1,000 deduction on their federal tax return for their property tax, plus an additional deduction for any state income taxes they paid. But let’s take a deeper dive into comparative benefits.
Consider a second Bridgeport home valued at $1,000,000. This property’s tax bill would be almost $38,000. The full SALT deduction would give this homeowner almost an additional $28,000 deduction, substantially more than their counterpart in a more modest dwelling.
Bridgeport has no $10 million homes, but Fairfield County’s Gold Coast does. In New Canaan a $10 million home would be taxed at over $127,000. Removing Trump’s SALT cap of $10,000 would provide this lucky homeowner with an additional $117,000 federal tax deduction.
Now, you might think it would be equitable if the property tax bill for a New Canaan home worth ten times a Bridgeport home were ten times that of the Bridgeport property. Instead, the fortunate New Canaanite’s property tax bill is less than four times the Bridgeport homeowner’s, because of the disparity in local mill rates. But this inequity is a subject for another column.
Not all plutocrats live in spartan $10 million mansions. Bill Gates’ Seattle estate is worth more than $131 million. And the New York Times recently advertised a Beverly Hills estate—27,000 square feet, 11 bedrooms, tennis court, pool and screening room—for $115 million. California property taxes are based on the purchase price, and in Beverly Hills the effective property tax rate is 1.1%. So a buyer purchasing this property at the listed price would get a whopping tax deduction of $1,265,000 from a full SALT deduction.
These examples take only local property taxes into account. While the analysis would be more complete by taking state income taxes into account, it is clear that a full SALT deduction would be another tax give-away to the wealthy. According to the Institute on Taxation and Economic Policy, approximately 85% of its benefit would go to the richest 5% of households.
The richest Americans benefited disproportionately when President Trump reduced corporate taxes, cut the top personal tax rate and raised the income level at which it kicked in. By definition his tax plan was regressive, burdening poorer households in comparison to wealthier households.
But a full SALT deduction is not a good deal for working- and middle-class families. The SALT deduction benefits the rich far more than the poor, and progressives should not lobby President Biden for it. If they are concerned about the tax burden on working class families struggling to buy their first home, perhaps a modest increase in President Trump’s $10,000 SALT cap is worth considering.
If the SALT deduction is increased, we need to return to a limitation on total itemized deductions to prevent a windfall. Prior to President Trump’s tax reform, overall itemized tax deductions were reduced once a threshold in adjusted gross income was reached. This at least prevented itemized deduction windfalls from high SALT deductions.
Of course, also worth considering is the fact that renters see significantly smaller benefits from the SALT deduction. And while increasing the rate of home ownership may be a worthwhile goal, the true crisis in our housing market is homelessness.
More than 111,000 students in New York City are homeless. To get some sense of the extent of this crisis, compare that startling number to the total number of students attending Bridgeport public schools, about 23,000. Maybe it’s time to worry less about promoting home ownership, and more about providing decent, affordable housing for all.
Dr. Gerics is a retired Catholic school teacher and administrator.
He is a member of the Stratford Democratic Town Committee.