SALT reform: Deduction loss may cause real pain for rural Colorado, state and local governments

Monday, Dec. 4, 2017 5:15 PM
Sen. Ron Wyden, D-Ore., left, the top Democrat on the Senate Finance Committee, criticizes the Republican tax reform plan while Chairman Orrin Hatch, R-Utah, center, and Sen. Chuck Grassley, R-Iowa, far right, listen to his opening statement as the panel begins work overhauling the nation’s tax code, on Capitol Hill in Washington, Monday, Nov. 13, 2017. The legislation in the House and Senate carries high political stakes for President Donald Trump and Republican leaders in Congress, who view passage of tax cuts as critical to the GOP’s success at the polls next year. (AP Photo/J. Scott Applewhite)

There is a lot to take issue with the GOP’s rush to pass tax reform legislation.

Foremost among our concerns is why, with an almost $20 trillion federal debt, are we even discussing tax cuts? Taking $1.5 trillion out of the economy with zero guarantee it will be reinvested to grow is a net loss. History has repeatedly demonstrated this.

Not only will the approach the GOP is taking – offering little analysis and no hearings to consider expert testimony – negatively affect health care, education, transit, social services and more, it is likely to hurt state and local governments, too.

One of the “reforms” Congress has passed is the elimination of the deduction for state and local taxes (SALT). There are a variety of those taxes, but the big three are state income tax, property tax and sales tax.

In recent years, taxpayers have had to choose between deducting state income tax and sales tax. Income tax is generally the higher number, and it’s easier to document than sales tax. Losing the sales-tax deduction is a concern for sellers of high-dollar items, but although the loss of a deduction next April may influence purchasers to spend a little less, it’s not likely to push them out of the market entirely. Vehicles and appliances are big purchases, but they’re also essentials.

It is the loss of the property tax deduction that can have a larger influence over taxpayers’ behavior, especially when it comes to deciding whether to vote for tax increases to pay for local and state services. In some places, it may make passing revenue measures almost impossible.

Colorado has a constitutionally complicated tax structure. The Gallagher Amendment requires non-residential properties to make up 55 percent of the state’s assessed value. In Southwest Colorado, that has meant that gas and oil have made up a huge percentage of the tax base, while residential property taxes have remained low. The Taxpayer Bill of Rights amendment, meanwhile, basically prevents taxing entities from raising property taxes without a vote; voters can just say no.

Supporters of tax reform claim that the SALT deduction subsidizes state and local governments at the expense of the federal government. The deduction has an estimated federal revenue cost of $96 billion in 2017. No wonder, then, that the GOP views it as a way of paying for tax cuts.

It also disproportionately benefits residents of places where property taxes are high. Just six urbanized states account for more than half of the monetary value of the deduction. The benefit to lower-tax states like Colorado is small.

In 2015, only 28.3 percent of filers deducted state and local taxes; for taxpayers with income of less than $50,000, only about 10 percent did. The increase in the standard deduction will significantly reduce the number of filers who benefit from the SALT deduction.

According to the Tax Policy Center, those with annual income above $100,000 – only about 16 percent of tax filers – accounted for approximately three-fourths of the total dollar amount of SALT deductions claimed.

Tax policy is complicated, and a lot remains to be seen, but if federal tax reform hampers the ability of state and local governments to fund basic services by taking away a valued, though often unused, benefit, that’s a problem that may hurt rural Colorado.