State And Local Tax Deduction Limit Repeal As COVID Relief

In the latest episode of the long-running soap opera over the state and local tax deduction, the New Jersey delegation to the House framed removing the current deduction limit of $10,000 as COVID relief in a letter to House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Charles E. Schumer, D-N.Y.

The letter recited most of the usual arguments supporting repeal of the SALT deduction limit, so let’s take a look at the points it makes and consider whether they’re worth their . . . salt. 

The New Jersey representatives started out strong: The SALT deduction has “historically strengthened state and local government functions.” That seems to have been its original purpose, and it clearly was the reason Congress gave in on preserving it in the 1980s, when President Reagan planned to eliminate the deduction.

That purpose is a liability for the SALT-deduction-as-pandemic-relief argument, however, because making it politically easier for state and local governments to raise taxes should be low on the list of Congress’s fiscal priorities in responding to the economic devastation of the pandemic. 

If Congress wants to help relieve the state budgetary shortfalls, a much better, targeted approach is direct aid to state and local governments.

'Textbook' Relief

The next assertion the New Jersey representatives make is that the SALT deduction limit is “a textbook method” to direct relief to “communities ravaged by the pandemic.” 

It’s unclear which groups of people they mean, because the previous paragraph recounts the layoffs in the state public sector and the SALT deduction limit almost exclusively affects high-income taxpayers. 

It’s unlikely that the SALT deduction limit would be a financial help to many of the public sector employees who were laid off, and directing economic stimulus efforts to high-income taxpayers in high-tax jurisdictions is quite far from “textbook” stimulus.