October 4, 2017
U.S. House of Representatives
Washington, D.C. 20515
Dear California Member:
On Sunday during an appearance on ABC’s This Week, Treasury Secretary Steve Mnuchin appeared to acknowledge that many middle-class California taxpayers could face tax increases under the Big Six tax reform plan, due in part to its proposed elimination of the state and local tax deduction (SALT). In response to questions about the impact of the plan on middle-class taxpayers, the Secretary said that elimination of SALT in California “creates certain issues.” When pressed about what he would do to address these issues, the Secretary provided no details and instead offered the hardly reassuring explanation that he’s “trying to create certain adjustments so that the middle class and New York and California don’t get hit hard” by the loss of the deduction.
Mnuchin’s “don’t get hit hard” comments stand in stark contrast to warnings issued by some of the state’s newspapers. The San Diego Union-Tribune wrote the Trump plan “deeply disappoints” and explained that middle-class Californians were unlikely to be winners due to the elimination of SALT. The Mercury News had a dire warning for homeowners, “Trump tax plan drives up cost of owning California home” due to the loss of SALT, as did The East Bay Times. Coverage in the Sacramento Bee, “Trump’s tax overhaul could hurt many Californians,” and the Los Angeles Times, “Why Trump’s tax plan will hit Californians especially hard,” also prominently described the adverse impacts on the state’s middle-class taxpayers caused by eliminating SALT.
The fact is that virtually any plan that eliminates or modifies SALT is going to hit middle class taxpayers in California disproportionately hard. That’s because the average SALT deduction in California was $18,438 in 2015, the third highest among all states. And, the 6.1 million California households (34% of all tax filers) who claimed the SALT deduction in 2015 ranks 10th overall.
While providing no solutions for middle-class California taxpayers, Secretary Mnuchin spent much of his time on This Week criticizing SALT, a benefit claimed by more than a third of households in the state. He repeatedly referred to it as a subsidy “to New York and California.” But the Secretary’s characterization is based on a misreading of the facts. In our complex federal system, the only fair way to assess which states subsidize or benefit from Washington is to take all taxes paid to the federal government, and all funds received from Washington. The Rockefeller Institute of Government recently conducted this analysis and concluded that 13 states send more to Washington than they receive, including California (see chart below). Moreover, the Rockefeller analysis is based on actual taxes paid, which includes the state and local tax deduction. Thus, any change to or elimination of SALT is likely to exacerbate the disparities already revealed by the Rockefeller analysis.
The members of Americans Against Double Taxation hope you will agree that tax reform should be grounded in sound tax policy and financial analysis, not political slogans. Moreover, if tax reform is going to be fair to the middle class and to taxpayers in all states, it can’t be financed in large measure by eliminating the most popular deduction for households, which enables taxpayers to deduct the mandatory payments they make to support vital public services that benefit all citizens in their states and communities. Indeed, the elimination of SALT amounts to a $1.3 trillion revenue grab by Washington from households. Individuals and households already pay 83% of all federal tax revenues.
The SALT deduction has been part of the federal tax code as long as it has existed, including in the emergency civil war tax in 1862. It has served to protect state and local fiscal systems and preserve our fiscal federalism, while at the same time guarding against double taxation – taxpayers being hit with a federal tax on income they already pay in state and local taxes. For all of these reasons and to ensure taxpayers in California and all 50 states are treated fairly, we urge you to preserve SALT as part of any tax reform and speak out strongly to support it.