07.20.2018 0

Rubbing SALT in the wound

By Printus LeBlanc


New York, New Jersey, Maryland, and Connecticut announced a lawsuit against the federal government this week. It is not odd for states to sue the federal government. The practice happens quite often actually. Mostly it deals with the federal government overstepping its bounds or the feds are not fixing a federal problem. But the new lawsuit takes the cake.

The four progressive high tax havens are suing the Trump administration because the tax cuts passed last December capped the state and local tax deductions, also known as SALT. The deductions give taxpayers that itemize their deductions the ability to deduct certain taxes paid to state and local government from income for federal tax liability purposes.

High tax states love the deduction because it is nothing more than a subsidy. The states get to spend with no regard to consequences, because the SALT deduction would be there to bail them out when they raise their taxes. The Tax Cuts and Jobs Act changed that by limiting the deduction to $10,000 and those states were not happy.

The lawsuit alleges capping the deductions to $10,000 is an “unconstitutional assault on states’ sovereign choices.” The argument is a nonstarter, because the legislation does nothing to any taxpayer’s property tax, state income tax, or sales tax. If a state wants more revenue, it can raise taxes. It a state doesn’t want to raise taxes, it can cut revenue.

Americans for Limited Government Vice President of Public Policy Robert Romano questions the validity of the law suit stating, “Congress has the plenary power to set tax rates and to set the size of deductions, which apply to every single state. The SALT deductions in many cases were simply modified and limited by Congress. In other words, the states are in essence quibbling over how much of a deduction their citizens will be receiving. It’s a nonsense lawsuit. They’re still getting deductions, just not as large as they once did. There is no right to a tax deduction.”

It is no surprise the four states suing are also financial basket cases. The Mercatus Center at George Mason University annually ranks the fiscal health of all fifty states and the four states suing are not prominently featured. In fact, New Jersey is dead last, with Maryland rounding out the bottom 5. Not to be outdone New York and Connecticut are still in the bottom 15. Is it any wonder they are suing? The states don’t know how to manage fiscal matters and feel the only solution is more of someone else’s money. The residents are noticing this and are starting to vote with their feet.

The states in the lawsuit are also on the losing end of the tax migration battle. New York alone has lost over 500,000 people since Gov. Andrew Cuomo was sworn in, taking with them $27 billion in economic activity. A recent United Van Lines moving study, found New York, New Jersey, and Illinois had the highest percentage of relocations occurring outside the state, 63.4 percent. Connecticut was number four. The numbers mean for every person that moves into the state, two move out, and with them goes the economic activity, putting a greater strain on state finances. If the states would get their financial house in order, they would not be in the situation they are in now.

This is going to create a vicious cycle for the high tax states. They raise taxes to make up for lost revenue, thereby chasing away people that can afford to move. The exodus creates more budget gaps, forcing the states to raise taxes again. The only way to get the problem under control is to cut spending and make the state business friendly. Without drastic action, the high tax states are doomed to fail.

Make no mistake about it, this has nothing to do with the Constitution, and everything to do with subsidies. The four states that filed suit have been living of the federal taxes paid for by states like Florida, Texas, and Wyoming for decades. The capping of SALT deductions forces the states to prioritize spending or raise more revenue through taxes. That is not unconstitutional, it just requires fiscal discipline, and they have none.

Printus LeBlanc is Legislative Director at Americans for Limited Government.

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