Whoever coined the phrase, "There are three kinds of lies: lies, damned lies, and statistics," must have been talking about tax reform. Dare to propose changes to the federal tax code, and lies begin swirling faster than you can say "IRS."
Last week, for example, the House passed a major tax overhaul that would repeal the state and local tax (SALT) deduction. Critics suggest that repealing this deduction would be disastrous, warning of "double taxation" and claiming an "attack on the middle class." But here's the truth:
Repealing the SALT deduction would both cut taxes for the middle class and boost our overall economy.
The deduction allows taxpayers who itemize — about 30 percent of filers — to deduct state and local property taxes and either sales or income taxes from their taxable federal income. Those opposed to reform misuse statistics by taking the total benefit of SALT and dividing it by the number of filers to then claim the "average taxpayer" will pay more in federal taxes.
On the contrary, the vast majority of the middle class do not receive any benefit from the SALT deduction. Less than 15 percent of those with below $50,000 in adjusted gross income (AGI) use the deduction. In fact, the benefits are heavily skewed toward higher income earners. In Pennsylvania, those making more than $100,000 and claiming the deduction represent just 13 percent of the population but receive about half of the benefit.
Repealing SALT would generate up to $1.7 trillion over 10 years, which could fund broad-based tax relief, such as doubling the standard deduction, lowering marginal rates on personal and pass-through income, expanding the child tax credit, and making our corporate tax rates — the highest in the industrialized world — far more competitive. Middle-class earners would keep more of their paychecks from this relief than they do through the SALT deduction.
What's more, the SALT deduction creates a moral hazard for high-tax state and local governments by giving them a perceived "justification" to raise taxes, since residents can claim higher taxes as deductions on their federal income tax returns. For example, SALT deductions represent upward of 8 percent of federal AGI in high-tax states such as New York, New Jersey, and Connecticut. In low-tax states such as Florida, Texas, and Nevada, however, the deduction amounts to less than 3 percent of AGI. The slack must be picked up by other states in the form of higher federal tax rates.
Defenders of the status quo argue that repealing SALT would amount to "double taxation." Yet, this ignores the fact that state and local taxes fund very different things from federal taxes. Does it make sense to deduct the cost of maintaining local roads from the cost of the U.S. military? Not at all. SALT deduction proponents and big government advocacy groups are simply distorting the meaning of "double taxation" as a scare tactic to drum up opposition to reform.
While eliminating the SALT deduction more directly impacts higher-income earners, the overall tax reform package will reduce business and individual income tax rates, incentivizing productive activities rather than encouraging state and local tax hikes.
The proposed tax reform would be a win for our overall economy, too, by bringing our corporate tax code in line with the rest of the developed world. Over the last three decades, the United States' primary global competitors have reduced their corporate tax rates, gaining a competitive advantage in the global marketplace. By matching the worldwide average corporate tax rates, we can once again compete on an even playing field.
The tax framework now being discussed is not perfect, but the elimination of the SALT deduction to fund broad-based tax simplification and reductions is one of its best elements. Our federal tax code should not reward largesse and over-taxation by state and local governments by providing them an "out" to raise taxes.
Instead, our tax code should allow workers to keep more of their hard-earned paychecks and create an environment that will encourage long-term economic growth and prosperity.