How the SALT deduction undermines federalism
Some in Congress want to raise the cap on the State and Local Tax (SALT) deduction, letting taxpayers deduct more from their federal income taxes from what they pay in high-tax states and localities. Obviously, many oppose that, particularly those in lower state and local tax climates. Should they be forced to pay for those upper middle class / wealthy tax deductions? Plus, it hides the real cost of bad tax and spend policies, making state and local governments less accountable to the people by using the federal government to mask it.
One of best explainers of SALT deductions I’ve seen so far comes from Thomas Savidge at the Civitas Institute at the University of Texas at Austin. He lays out all the bad that ensues from SALT deductions, which may increase even more from this supposed “Big Beautiful Bill” before Congress now. Below is a key highlight from Savidge, but really encourage readers to check out the entire article.
Policy analyst David Ditch comments, “[The SALT deduction] reduces the political cost [of increasing taxes], making state and local officials more comfortable with tax-and-spend budgeting.”
Federal transfers to state governments exacerbate this issue. The average state government has over one-third of its expenditures covered by federal transfers, with 56 percent of transfers explicitly earmarked for Medicaid. Medicaid is jointly funded, with the federal government paying $1.33 for every dollar the state spends on low-income enrollees and $9 for every dollar the state spends on Medicaid expansion enrollees.
This arrangement enables state governments to boost Medicaid spending to maximize federal matching dollars. Matthew Dickerson notes that this dynamic allows state governments to offload financial responsibility onto taxpayers in other states.
This deadly combination encourages what Michael Greve calls “Cartel Federalism,” where states “collude and induce the federal government to suppress competition on important margins and, ideally, all of them.” This combination increases federal influence over state policy by tying funding to specific terms and conditions, reducing incentives for innovation and forcing conformity.
Federalism works best when states feel the consequences of their own choices—good or bad. SALT undermines that basic concept.
— The Federalism Beat