State, local tax deductions are vital to city
As part of its ongoing deliberations on tax reform, Congress has proposed to eliminate the ability for taxpayers to deduct the taxes they pay to the state of Texas and the city of Houston. Eliminating the state and local tax (SALT) deduction will not only result in a tax increase for close to 600,000 Houstonians — it will also hinder the city’s ability to provide essential services to its residents.
The state and local tax deduction has been part of the federal tax code for more than a century. Initially introduced in the Revenue Act of 1913, it allows American taxpayers to deduct all national, state, county, school and municipal taxes paid within a tax year. Deductible tax categories include real and personal property, income and general sales taxes.
For the city of Houston, the SALT deduction is a critical factor in how the city calculates its tax rate. Because it is part of the existing tax structure, the deduction is a stabilizing mechanism for how the city budgets for and provides essential public services to its residents. The deduction also allows the city to lower the local tax burden, as taxpayers can write off what was paid to the locality at the end of the year. A tax reform plan that eliminates the SALT deduction will preclude taxpayers from claiming this benefit.
Repealing the SALT deduction would also put pressure on the city to lower local taxes to offset the rate increase at the federal level. Although lowering local taxes may seem appealing, this would likely mean a reduction in essential services, spending on capital equipment and a decrease in infrastructure investment.
For Houston taxpayers, the benefits of the SALT deduction are straightforward.
First, by allowing taxpayers to deduct state and local taxes, taxpayers avoid being taxed twice on their income. Secondly, giving taxpayers an opportunity to claim deductions on their property taxes and mortgage interest lowers the financial burden of owning property and, thus, incentivizes homeownership — a critical component for a thriving, fiscally sound city. The sales tax deduction provides similar incentives for encouraging spending and facilitating economic growth.
The SALT deduction is claimed
Eliminating the SALT deduction will result in a tax increase for Houstonians of all income levels.
by 25 percent of filers in the Greater Houston region, with an average deduction of $8,095. It is claimed by filers of all income levels and benefits filers more than other common deductions like the charitable giving and mortgage interest deductions. More than 60 percent of deductions from taxpayers earning less than $50,000 come from the taxes paid on personal property. This highlights how important the property tax deduction is for middle class Houstonians and their ability to own property.
Put simply: Eliminating the SALT deduction will result in a tax increase for Houstonians of all income levels. Even if the standard deduction is doubled, the difference will not be able to offset the elimination of the SALT deduction for most filers. For most Houstonians, that math doesn’t make financial sense.
A fiscally responsible tax reform plan has the potential to address the rising federal deficit, spur economic growth and help Houstonians keep more money in their pockets. And although meaningful tax reform is long overdue, any plan that eliminates the SALT deduction will do just the opposite. It’s incumbent on Congress to protect taxpayers and municipalities by preserving the state and local tax deduction.