Personal Finance

One Big Change in Trump's Tax Plan Could Hit Wealthy Blue-Staters Hardest


The White House has been pressing forward with an aggressive agenda, with President Trump expressing a particular eagerness to reform the U.S. tax code. President Trump announced details of his tax plan shortly before his 100th day in office, promising the largest tax cut since Reagan's time.

Trump's tax plan would fundamentally reform the tax code in many ways, but there's one provision of his plan that seems almost targeted to hit the pocketbooks of wealthy blue-state residents: a plan to repeal the federal tax deduction for state and local taxes. Repealing this deduction -- dubbed the SALT deduction -- would increase federal revenue by as much as $1.3 trillion over the course of a decade, with two-thirds of that additional revenue coming from the 18 states that went for Clinton in 2016.


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How does the SALT deduction work?

The state and local tax deduction allows taxpayers who take itemized deductions to deduct either state income taxes or state sales taxes from federal taxable income, with most taxpayers opting for income taxes. Property taxes are also deductible.

Some type of deduction for state and local taxes has been permitted since 1913, when the federal government first began collecting tax -- although reforms have occurred over the years -- and the deduction protects taxpayers from paying federal taxes on money sent to local governments.

The Alternative Minimum Tax (AMT) and the Pease limitation on itemized deductions -- which reduces the value of deductions by 3% for each dollar of taxable income exceeding a specific threshold -- reduce the benefits of this deduction for some wealthier taxpayers. Nonetheless, more than 95% of all taxpayers who itemize claim the SALT deduction.

Of course, the deduction is obviously worth much more to tax filers in states with higher state and local taxes. The larger your local tax bills, the more money you deduct from your federal taxable income.

Who would pay if the SALT deduction were repealed?

Allowing taxpayers to deduct state and local taxes cost the federal government $96 billion in lost revenue in 2017. If the deduction is repealed, taxpayers will be paying a lot more to Uncle Sam.

But these costs won't be spread evenly. In fact, the voters most likely to have cast a ballot for Clinton will be footing the bill. The repeal of the SALT deduction falls so disproportionately on blue states that some refer to it as a tax on liberalism . Blue staters are not only more likely to take this deduction -- 45% of Marylanders claim it, compared with 15% of West Virginians -- but are also much more likely to deduct large amounts.

In California, more than 20% of taxpayers would see a tax increase due to repeal, with the average increase coming in at $3,218. New Yorkers would fare worse: More than 30% of Empire State residents would pay more, and the average increase is a startling $4,250.

Around a third of all filers in Connecticut, Maryland, New Jersey, Massachusetts, Washington D.C., and Virginia would also pay more in federal taxes, with Connecticut residents facing the nation's highest average increase of $4,286.

That said, wealthier residents in all states would take a hit if the SALT deduction were eliminated. In 2014, 81% of filers with incomes exceeding $100,000 deducted for state or local taxes, versus just 10% of those earning $50,000 or less.

It's true some red staters would also pay more, but not nearly as many and not nearly as much. In Mississippi, less than 10% of tax filers would face a tax increase, with the increase averaging just $1,223. Less than 10% of Floridians facing a bigger tax bill would pay an average of just $1,453 more, while fewer than 10% of Wyoming residents would pay an average of just $943 more in federal taxes.

Why are blue state residents hit so hard?

There's a simple reason why blue state residents would pick up most of the tab for the repeal of the SALT deduction: Blue states tend to have higher taxes to support costly programs disproportionately favored by Democrats.

In 2017, New Yorkers had the highest total local tax burden of any state in the country, with property taxes, state income taxes, excise taxes, and sales taxes adding up to 12.94% of total personal income. Hawaii, Vermont, Connecticut, New Jersey, Illinois, and California were also among the 10 states where local taxes took the biggest bites out of residents' incomes. Tennessee, Florida, Alabama, South Dakota, and Wyoming, by contrast, had some of the lowest state and local tax burdens nationwide, with Tennessee residents facing around half of the tax burden of New Yorkers.

There's an argument to be made that states that want to fund more services shouldn't expect the federal government to subsidize their bigger governments with billions in tax breaks. But whether you buy that or not, one thing is clear: Trump's tax plan would substantially raise the tax bills of some of his staunchest opponents.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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