Worth its SALT

Deduction at risk in tax bills Guest writer

SALT. That’s the acronym for state and local taxes. And in the tax package recently passed by the House of Representatives, and in the separate Senate bill not yet passed, the practice of deducting from our federal taxes the state and local taxes we pay in Arkansas would be partially or totally eliminated.

It’s called the SALT deduction. The result would be an increase in marginal tax rates for those Arkansans who itemize deductions on their tax returns. Regardless of how much tax rates are reduced by the bills.

Ours is a federalist form of government. Federalism, as established by our Constitution, divides power between a central government and state governments. States, then, divide certain powers with local governments. This model derives all power from the people. Consequently, power flows from the local level to the federal level. From the bottom up.

Constitutional scholars teach us that what is not spelled out in the Constitution as the province of the central government is reserved to the states. And that includes the power to tax on the state and local level.

When our federalist system was in its infancy, taxing power was almost exclusively at the local level. In fact, the federal income tax was not legalized until 1913. That’s when the 16th Amendment to the Constitution was ratified. And the deductibility of state and local taxes from the federal income tax has been in place ever since.

So the case can be made, and is being made by the likes of the right-leaning American Enterprise Institute, that state and local taxes “precede” federal taxes. To avoid double taxation, then, state and local taxes are deducted from the federal tax. One could logically state that the SALT deduction supports and is in fealty to the very essence of federalism. The SALT deduction is at the core of our conservative form of limited government.

However, so-called conservatives on the federal level don’t see it that way.

Here’s the deal. The tax package is being promoted as tax reform, when it can be effectively argued it is simply a series of tax cuts. And some of the cuts will be paid for, or attempted to be paid for, in the “out years” (that’s Washington-speak) by increased taxes on those having an annual income of $75,000 or less.

That’s coupled with other restrictions like reducing what can be deducted based on charitable giving, and the deduction of state and local taxes from the federal income tax. Curious.

But regardless of paid-for or trickle-down schemes, the Congressional Budget Office has projected the tax-package bills will increase the federal deficit by over $1 trillion. And that comes from the office headed by Keith Hall, who served as chief economist on former President George W. Bush’s Council of Economic Advisers, and who was appointed by Republican leadership in 2015 to head the CBO agency.

But I digress.

Maintaining the SALT deduction is a cornerstone of our system of government. The American Enterprise Institute, supported by none other than the Koch Brothers, has stated, “The SALT deduction … is a lynchpin of the federalist system. Just like the charitable deduction expresses our preference, as a society, for civil-society solutions … the SALT deduction expresses our preference for local solutions to local problems.”

We in Arkansas have learned over the past several election cycles that our local voters are willing to increase their own taxes in pursuit of public projects and policies that improve the quality of life in the state in general, and in their local communities in particular. And while we need a broadbased, fair and limited-loophole federal tax system to get our larger house in order, local taxing authority and ballot-box support helps further the notion of the shared-power experiment instituted by the federal founders.

We hope the Congress will keep state and local tax deductibility as part of our tax policy. This kind of SALT is good for us.