March 3, 2023 Reading Time: 5 minutes

Prior to the passage of President Trump’s Tax Cuts and Jobs Act (TCJA) in 2017, state and local income and property taxes were fully deductible from income subject to federal taxation. This has commonly been referred to as the SALT deduction. The TCJA capped those deductions at $10,000 for property and income taxes combined. This change significantly impacted taxpayers in high property and income tax states like New York, California, and Connecticut. And while the Democrats promised to repeal these restrictions, it is a promise they have been unable or unwilling to keep. 

Furthermore, in a strange reversal of traditional roles, many conservatives and libertarians have been, and continue to be, supportive of limiting or even completely eliminating these deductions, which clearly amount to a targeted tax increase on specific, mostly higher-income Americans. It should be noted that the $10,000 limit is not adjusted for inflation, so with the increase in average housing prices, this tax hike is impacting people with lower real incomes as time passes. 

Arguments in Favor of Limiting the Deduction

There are two main arguments that primarily right-leaning pundits have put forth in favor of these limitations. They point out that people living in higher-tax states “benefit more” from unlimited state and local tax deductibility than do people in lower-tax states. They argue that this justifies limitations on the deduction, because these differentials between states actually constitute an “unfair subsidy” to those living in the higher-tax states by those living in lower-tax states.

In a tax setting, to subsidize means either to directly take income from some and transfer it to others, or to benefit some categories of taxpayers by allowing them to operate under a different set of rules than other taxpayers. The deductibility of state and local taxes does not fit either of these categories. But more importantly, to call this deduction a subsidy of one set of taxpayers by another is putting the cart before the horse. The first question that needs to be answered is what should a properly constructed tax base look like, and is it appropriate to include in that tax base income that people are compelled to use to pay state and local taxes. If it is not, then any talk of subsidizing one group by another due to not taxing these revenues is irrelevant.

Layered on top of this argument, some important voices, particularly on the libertarian right, have expressed the concern that deductions for state and local taxes are regressive. In 2017, the Tax Foundation’s Nicole Kaeding argued that the deduction should be disallowed because “almost 90 percent of it flows to those with incomes in excess of $100,000.” And in 2019, when Democrats attempted to repeal the limitations, the headline at read, “Eat the Rich: Democrats Plan to Pass Huge Tax Breaks for Wealthy Homeowners.” It is unclear why otherwise free marketeers would ever favor what could be described as a discriminatory tax increase. It is even more inexplicable that their arguments would be based on an egalitarian approach to tax fairness that is inherently unfriendly to freedom and free markets.  But regardless of whether the question of regressivity is important, if this is income that shouldn’t be taxed in the first place, the regressivity argument, like the tax subsidy argument, is irrelevant.

What’s Being Ignored?

The question typically raised is, should income used to pay taxes be taxed at all? Or, more broadly, should you be taxed on income you are not allowed to own? As a question of simple tax fairness, it is difficult to see how the answer could be yes. That would be to claim that it is morally justified for an individual to be taxed on someone else’s income. This is exactly the case with income that goes to paying state and local taxes. It is income we are forced to give up all rights to, with no enforceable promise of anything in return. Legally, as opposed to morally, this money is not our own; we have no choice about how it is allocated. Therefore, not allowing state and local taxes to be deducted from federal taxes is the moral equivalent of taxing people on income that is someone else’s. In this case, it belongs to the state or local government.

In addition to the moral argument, which I think is the most compelling, basic supply-side economics of taxation also suggest that state and local taxes should be deductible from taxable income at the federal level. To avoid biasing the tax system against saving and investment, only income used for consumption purposes should be taxed. Taxing all income creates a bias in favor of consumption. I will argue below that to disallow the deduction of state and local income and property taxes exacerbates this bias. Note that state and local taxes are not part of the taxable base under a traditional consumption tax, such as a national retail sales tax.

Properly, no one suggests that a sales tax, for example, the FAIR Tax, should apply to state and local tax payments, only to purchased goods and services. The functional equivalent of a sales tax, using income as the base rather than sales, is what is known as the consumed income tax, or what the late Norman Turé called the inflow-outflow tax. With an income-based consumption tax, like a sales tax, any income not used for consumption is not part of the tax base. These were the basic principles behind Ronald Reagan’s Economic Recovery Tax Act of 1981 (ERTA) and Steve Forbes’ flat tax.

Under a properly constructed consumption tax of any kind, taxes paid to one level of government are deducted from the tax base at other levels of government. Norman Turé, widely considered to be the chief architect of ERTA, and described by the Wall Street Journal as being “among the most economically rigorous of the supply side theorists,” describes the appropriate tax base as follows:

An individual’s revenues from work, saving, and transfer payments received — would be taxable. Outflows associated with earning the revenues (such as net saving, investment, and some education outlays), and income transferred to others… would be deductible. Net taxable income would, in effect, consist of revenues utilized for the individual’s own consumption…People should be taxed only on the income over which they retain control and of which they enjoy the benefit. (emphasis added)  

Turé then goes on to emphasize that tax payments don’t fit this category:

All payroll and state and local taxes would be deductible as income over which the taxpayer has lost control and transferred to others. State and local taxes are involuntary outflows.

Consistent with Turé’s and others’ supply-side analyses of the “non-neutral” effects of taxation is the fact that property taxes are a form of wealth tax. Therefore, they are biased against accumulating wealth in the form of real property, and by implication biased against saving and investment relative to consumption. Similar analysis can be applied to state income taxes which, by including both saved income and the returns on those savings in taxable income, also create a bias against saving and investment. For the federal government not to allow these taxes to be fully deductible exacerbates these biases.


The 2017 Tax Cuts and Jobs Act, and its limitations on SALT deductions, are scheduled to expire in 2025. While it would be good to restore the deduction sooner, Congress will likely not consider the issue in the near term. This means that in the coming two years, there is likely to be a fierce debate over whether to let the entire Act expire, which would mean a major tax increase; to renew the Act as it was originally passed, including the caps on SALT deductibility; or to keep some aspects of the 2017 legislation and let others parts of the the tax code return to their pre-Trump status. This third option is the most likely, regardless of which party controls Congress during the debate. 

Restoring 100-percent deductibility of state and local taxes could be an area of bipartisan agreement. While Democrats already favor this change, it would mean that Republicans would have to reverse their previous position on the issue. But that would not mean having to sell out their principles. Restoring full deductibility would realign the party’s position on this issue with a more free-market approach to tax fairness and its long-time support of supply-side tax analysis, which guided most of the other changes in 2017.

Roy Cordato

Roy Cordato, Ph.D., is Senior Economist Emeritus and was the first VP for Research at the John Locke Foundation in Raleigh, NC.

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