By fighting the removal of the state and local tax deduction, Minnesota Democrats show that tax rates do matter
Last week, the Republicans released the ‘framework’ of their proposed tax reform. They claim it will lower tax rates and make the tax code simpler and fairer. Whether it achieves these aims or not, one thing it will do is raise Minnesotan’s taxes.
Your money, St.Paul’s, or D.C.’s?
The GOP plan proposes eliminating the state and local tax deduction (SALT). This lets tax filers deduct the taxes they pay to state and local governments from the total of their income calculated for federal tax purposes.
Those living in places with high state and local income or property taxes can save thousands of dollars a year. The top rate of state income tax in Minnesota is currently 9.850% on incomes over $156,911 annually. With the SALT, these filers can deduct the amount due under these rates from the income assessed for federal tax. In Twin Cities Business, V.V. Chari, a professor of economics at the University of Minnesota, explained how it worked as subsidy from Washington DC to state governments
He uses the example of a Minnesotan making $1,000,000 — subject to a 9.85 percent state income tax rate and a 39.6 percent federal income tax rate — to illustrate the point.
Deducting that person’s $100,000 tax liability to the state of Minnesota, Chari explains, means their federal taxable income drops to $900,000.
“What that means is your federal tax liability is $40,000 less than it would have been if your state and local taxes were not deducted,” he said. “It’s as if the federal government is paying $40,000 to the state of Minnesota on your behalf.”
And Minnesotans take advantage of this deduction. Roughly a third of the state’s tax filers claim some SALT deduction, well above the national average. Minnesotans
…deduct an average of $11,600. Fully half of Hennepin County households claim it, netting an average deduction of $17,600, according to the National Association of Counties.
Across the border in South Dakota — where there is no state income tax — the story is very different. Only 17 percent of filers claim the SALT deduction, and get an average deduction of $5,800.
Within Minnesota, the importance of the deduction depends on where you are. In the 3rd Congressional District, encompassing the affluent west metro suburbs, 46 percent of filers claimed an average deduction of $8,000, per a Bloomberg analysis. In the rural 7th Congressional District, however, only 25 percent of filers claimed an average deduction of $2,500.
If the SALT goes, however, the Minnesotan tax filers who claim the deduction would see an average increase of $2,261 in their federal tax bill, according to the Tax Policy Center.
High taxes are good, so what’s the problem?
Twin Cities Business writes that
The policy’s importance in the North Star State is fomenting interesting politics in Washington, with Minnesota Democrats generally in favor keeping a tax break primarily claimed by wealthy filers
But why would they do this? These are the people who have passed Minnesota’s high tax rates into law. These are the people who have told us high taxes are a good thing. These are the people who have said time and again that tax rates don’t affect decisions about location, employment, and investment. If they really believed that, why would they be worried? Surely people will be grateful to ‘contribute’ more money in taxation and carry on paying regardless.
Of course, the fuss about SALT shows what these policymakers really think. Talking about yanking up tax rates on the rich is one thing. Actually paying them is another. Actions speak louder than words, and in their defense of SALT Minnesota’s Congressional Democrats are saying loud and clear “No new tax”
John Phelan is an economist at Center of the American Experiment.