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Comment by bhupy | Hacker News Reader

Capping the SALT deduction doesn't stop states from raising their own taxes — it just makes it harder to hide higher state taxes behind Federal deductions. Keep in mind that State and Federal governments are two independent sovereign state actors, with their own expenditures and services. Both have to be paid for somehow, and SALT tax deductions just hide the true cost at the state and local level.

Also, the SALT deduction overwhelmingly benefited the rich, who arguably don't pay enough in taxes.

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Yes, all deductions hide the true costs. I don't see why people would be for SALT deductions. The only purpose (which deductions accomplish poorly) of a deduction is to reward the activity that qualifies for the deduction. I don't see why paying taxes should qualify for a deduction.

Then again, I'm in favor of removing all deductions. If government wants to incentivize some activity, then they should just pay for it. That way it can be properly accounted for.

Edit: I typo'd and wrote "I don't see why people would be against SALT deductions" instead of "I don't see why people would be for SALT deductions".

> I don't see why people would be against SALT deductions.

When the Federal government allows you to deduct certain line items from your taxable income, it's usually as an incentive for that thing (eg charitable donations deduction). It's really debatable if we really want to be incentivizing higher state taxes. While taxation is an important way to pay for necessary services, you need some downward pressure on it (just like prices) that ensures that we're spending every dollar as efficiently as possible.

If you have a more federalized tax structure where you pay more in state taxes than Federal taxes, you probably don't even need this kind of affirmative incentive anyway.

> If government wants to incentivize some activity, then they should just pay for it.

Agreed, and that's essentially what critics of the SALT deduction call it: the Federal government paying for, and as a result incentivizing states to increase their taxes.

Yes, I don't know why I wrote "against SALT deductions" when I meant "I don't see why people would be for SALT deductions".

SALT deductions (at least on Income Tax) are essentially meant to prevent double-taxation.

Why can the federal government tax money that can only possibly be in my pocket if I've committed tax fraud against my state?

If I make 100K and my state takes 5%, I now only have 95K. There's no option for me not to pay 5K to my state.

(and no, for most people uprooting yourself for tax purposes isn't a tenable option)

Now, I have to pay the federal government. Why should I be on the hook to pay taxes on 100K in income, when I truly only earned 95K?

With sales tax, you could theoretically not buy things subject to sales tax. With real estate tax, you could in theory just rent.

Yes, in practice it's not like taxes are so punitive that > 100% of my income will be demanded, but it seems unfair to levy such taxes.

This assumes, of course, that the state has the first dibs on a person's income. I'd be just as happy if the federal government amended the constitution saying that all states levying income tax must deduct federal taxes paid from taxable income amounts.

>SALT deductions (at least on Income Tax) are essentially meant to prevent double-taxation.

This is not double taxation.

https://www.investopedia.com/terms/d/double_taxation.asp

The federal government charges you x% for its services. The state government charges you y% for its services. The city government charges you z% for its services. The county government charges you a% of some arbitrary "assessed" property value. These are different entities who have the power to tax you.

>Why can the federal government tax money that can only possibly be in my pocket if I've committed tax fraud against my state?

What? This would only be the case if total taxes on your income exceed 100%. And typically, that would then be up to the courts to decide who is the senior creditor that deserves to get paid.

>Now, I have to pay the federal government. Why should I be on the hook to pay taxes on 100K in income, when I truly only earned 95K?

I disagree that you truly earned $95k. You earned $100k.

In theory, it could be problematic if all of your taxes add up to >100% of income, but I think that's more incentive for people to participate in their government and make sure that doesn't happen. But I don't see why a state that mismanages their defined benefit pensions and infrastructure, and hence has high taxes due to shifting costs from 30 years ago to today, should be getting a benefit for it.

Your link seems to me to clearly define this as double taxation

> Double taxation is a tax principle referring to income taxes paid twice on the same source of income.

and later

> Double taxation also occurs in international trade or investment when the same income is taxed in two different countries.

This state/federal dichotomy for the purpose of taxation is really no different than two countries taxing the same source of income.

Two entities are taxing the same income, and both must be paid. This is double taxation by the definition of the source you brought into the discussion!

> What? This would only be the case if total taxes on your income exceed 100%. And typically, that would then be up to the courts to decide who is the senior creditor that deserves to get paid.

No, it's true regardless of how much I've paid to my state. The 5K is gone. I don't have it. It's deducted from my paycheck. It never hits my bank account. I'm being asked to pay taxes on money I've used to pay taxes.

> I disagree that you truly earned $95k. You earned $100k.

You're probably right that earned was an imprecise phrasing for this. Received, perhaps? Regardless, the point still stands.

And to be clear I'm arguing from the standpoint of what I believe the principles ought to be, not of what the law is. As you state, when asking for money that I truly don't have due to contradicting demands on my income, courts would decide who receives what. I'm just arguing that the law ought to define that hierarchy, and any money already used to pay taxes ought not be taxed again by the secondary payee.

Taxation is just the price of the basket of services a government offers to its citizens. We don't deduct prices of other goods & services (food, clothing, rent, transportation) from our salaries before paying taxes on them, do we? It's no more double taxation to pay all of the different governments for their different basket of services as it is "double payment" to pay different service providers the price of their goods & services independent of one another.

> Taxation is just the price of the basket of services a government offers to its citizens.

No, those are user fees.

> We don't deduct prices of other goods & services (food, clothing, rent, transportation) from our salaries before paying taxes on them, do we?

Yes, we do, with a choice to take a simplified default amount.

But with SALT, I think the better argument is that the absence of the deductions (or limitations on them, which work the same way at some point) causes federal taxation to artificially incentivize low-tax state policy since it can switch policies from net expected positive to net expected negative value before to after consideration of federal taxation, whereas with SALT deeuctibility federal income taxation does not have any effect on the direction, only the magnitude, of expected value of state tax and spending policy.

There are actually deductions for the mortgage and pre-tax benefits for transportation.

Correct, and mortgage deductions are highly criticized for being a subsidy for the rich..

Pre-tax benefits for transportation are also not universal, and the State governments can deduct Federal taxes in their calculations if they want to follow that model.

All of these are also highly variable, and it's impossible to say how much is "needed" as a deduction. That gets into the government having to make value judgements on individual spending.

With a deduction for state tax, it's a lot more cut and dried "hey I don't have this money anymore because the state whose laws you officially sanction by virtue of their being part of your union is going to throw me in jail if I don't pay them".

Rent? variable? It's one of the most predictable expenditures.

I'm not sure if that's more or less cut and dried than "hey I don't have this money anymore because I had to pay money to not be literally homeless".

Deductions are an approach to reducing tax burden, but ultimately we have to decide if more taxes or less taxes are the way to operate our societies. The federalized tax system allows different states to experiment with different approaches, and these kinds of deductions incentivize behavior in one direction.

Variable from person-to-person based upon the quality of housing they choose to live in, not variable month-to-month.

Should someone living in a luxury penthouse suite at 15K+ a month get to deduct his rent at 100%, as well as closet-sized studio apartment? If not, where is the line drawn?

This is what I mean when I talk about value-based judgements based on variable rates.

Should I be able to deduct only what is literally the cheapest rent in my city? What if the cheapest apartment is full, and there's no way I could possibly get that rate? Should it be the cheapest AVAILABLE rate? Would this then impact prices knowing that the lowest rate drives tax-deductibility for all citizens?

This is the labyrinthine decision tree that opens up when deducting things like rent, food, clothing, etc.

Also, if SALT deductions truly incentivized punitive state taxes, why are so many states still charging 0% tax rates?

What other service providers throw you in jail if you don't pay?

I'm not sure what you're arguing here. If the argument is that taxation is too high, then advocate for cutting taxes. If the argument that taxes are too low, advocate for raising them. Pick a side!

I'm arguing that having the same income taxed twice due to a quirk in the structure of the US government is unfair, that is all.

Edit: it's not really on the income taxed, it's on the money already spent to pay a seperate income tax.

I don't agree with the characterization of different governments taxing the "same income twice". A city pays for things the federal government and the state government does not. Therefore, the city decides to implement a city income tax to pay for those things. There's nothing contradictory or wrong about this setup. Similarly, a state pays for things the federal government doesn't, and so they implement an income tax.

A county (or city) pays for things, and they decide to setup a property tax, taxing some arbitrary "assessed" value of your property. It doesn't mean anything to me to say your same income is being taxed twice, thrice, or 4 times. You're just paying for services to n different organizations, in this case, government agencies.

If the taxes are too high, then they simply need to be lowered. But not via deductions or any other game. Let the true prices be easily visible. No one forces a state government to implement a % of income tax, and if it's too high, then voters in that state should demand the the percentage be reduced, or implement a flat amount. Same for federal, same for city.

What SALT does is to ensure that the money that you never get is not being taxed.

Because states and cities provide services that federal government doesn't have to, so it benefits the federal government as well. If federal government would provide these services there wouldn't be need for SALT or local government taxes.

Anyway without SALT this is basically stealing from citizens. It's taxing money that citizens never see instead of taxing the money that they actually receive.

This is silly.

Say my tax rate is 10%. 10 = 5+5. Is that second 5% taxing money I never see?

My health insurance premium is deducted from my paycheck. Is that money I'm taxed on but never see?

I also get some employer paid health insurance. Is that unfair that I'm NOT taxes on that despite it helping me?

Again, the issue of fairness comes down to what the base is, not what the rate is.

What if my rate is 51% + 51% = 102%? (Unrealistic, yes, but gets to the heart of the "fairness" argument)

How am I suppposed to pay 102% of my income? Is that sustainable?

But if my state taxes me 51% of 100k, and there is SALT deduction, my federal taxable base is 49K instead of 100K, and I am now actually paying 24.9K instead of an impossible 102K.

Taxes are NOT service payments, they are a legal obligation, a good portion of which (rightly) pays for things you may not directly benefit from. It's in a completely different category than for-service healthcare, at least in my opinion.

Its amount is not also directly tied to how much money you make. If you know your income you could theoretically budget for such expenses.

Also, I believe healthcare premiums are in some (most?) cases tax-deductible, though this is somewhat besides the point.

I mean, that's largely the folly of having high Federal taxes. One of the political parties has made it is mission to reduce those, thereby blunting the supposed unfairness of this quirky structure.

To my mind, how much (rate) the federal government taxes your income is orthogonal to what (taxable income) the federal government is taxing. (Though obviously good policy need to consider how they interact)

Overall I believe the wealthy are not taxed enough, but I think that even though SALT deductions benefit the wealthy, a taxable base should still be calculated rationally and fairly. It's more of a principle-based than result-based argument.

Keep in mind that part of the problem in the US is that the wealthy pay an outsized portion of the taxes (top 1% nearly half the income taxes at both State and Federal levels).

Other OECD countries are able to fund more progressive spending by (counterintuitively) taxing more regressively via broad-tax-base middle class taxes and VAT.

How is that a problem? The top 1% (0.1% and 0.01%, really) have an outsize excess income.

It’s a problem because it raises less revenue, since the tax base is narrower. It’s also more precarious, because the tax base happens to be the most mobile. To give you a sense, New York State’s tax brackets are structured similarly to the Federal government’s: the top 1% pay ~50% of the state budget. That means that if just a small handful of highly mobile people leave NY, the State loses half its revenue.

In contrast, taxing the middle class raises more money, which allows the government to spend more progressively.

It's a lot easier to move state-to-state than to move out of the country and renounce American citizenship.

High federal brackets make sense.

Why should you get deduct $5,000 from your federal taxes when someone in a no income tax state like washington cannot deduct the other state taxes they pay that make up for not having a state income tax?

Edit: after looking it up, I'm wrong, you can deduct most state and local taxes such as property, income, and sales, although you can only pick either income or sales so it does incentivize states to only use one.

It still encourages wasteful tax spending though as my comment below explains.

Because people in other states can keep that $5,000 in their pocket. SALT prevented you from being taxed on money that you never get.

SALT is not a tax credit (you won't get $5,000 back), it is a deduction which means the $5,000 is not taxed, because it was already used to pay a tax.

But you do get that money, you get it and then it goes to the state and local government to provide you with your state and local services.

As a hypothetical, imagine 1 state which has very low taxes, say 5k on 100k income and does not provide very many services requiring the citizens to use post income tax money on all the goods and services they require such as rent, food, and healthcare. Now imagine another state which has super high taxes, say 40k on 100k of income, but the state massively subsidies their rent, food, gives them completely free healthcare and such.

Why should the person in the high tax state get to deduct the state and local taxes used to pay for similar services as the low tax one who has to pay for it with post federal income tax money?

To put it in more economic terms, SALT deductions incentivize state and local governments to increase taxes and spending to the point that the marginal utility of $1 provided by the government to citizens to equal the marginal cost of citizens taxes which include the SALT deductions or (1 / (1 - citizens marginal federal income tax rate)).

That literally creates waste because it incentivizes states and local governments to increase taxes to the point where citizens are seeing equal benefits with overall tax burdens at the cost of reducing the federal governments budget which ironically then encourages them to increase taxes to make up for it which then lowers the denominator in the states marginal utility to overall tax burden calculation in a positive feedback loop.

State and local government taxes aren't some kind of luxury items that I purchase and I can stop paying if I chose so.

They are complementing the federal government so it doesn't have to provide these services.

If federal government would take care of everything and this was some extra service then I would agree with you, but it isn't.

But you can move to avoid state and local government taxes to stop paying them.

And citizens in high tax states with high benefits that only benefit the local population get to reduce their federal tax burden with SALT deductions that others in the country don't benefit from.

Apparently I have to get more hypothetical, imagine 49 states introduce a 100% income tax but with that tax revenue, they give free rent, free food, free healthcare, free netflix, the works. With unlimited SALT deductions all of their income would go to the state governments and the 1 last state would be covering basically the entire federal budget (they get some from other things like corporate taxes).

Obviously totally unrealistic but the point is that increases in state and local taxes with SALT deductions benefit the state and local population at the expense of the federal governments tax revenue.

> But you can move to avoid state and local government taxes to stop paying them.

You overestimate how difficult this would be for the vast majority of people.

> imagine 49 states introduce a 100% income tax...

So your solution is to ask the citizens of states with 100% tax rates to pay > 100% of their income in taxes? How would this work?

SALT deduction was there so you weren't taxed on money that you never got (because it went to pay taxes).

That's not how taxes work though. I pay for a ton of other things besides State taxes, like my Spotify subscription, my rent, my food, my transportation — why not deduct all of that before paying taxes as well?

The State and Local governments provide a basket of services, and taxation is the price of those services. It's no more double taxation to pay all of the different governments for their different basket of services as it is "double payment" to pay different service providers the price of their goods & services independent of one another.

Because the state tax is not a Spotify subscription?

The State tax is a (variable) price we pay for the benefit of living in the State and enjoying the services it offers (policing, fire departments, libraries, schools, utilities, roads, property rights, etc)

A Spotify subscription is a price we pay for the benefit of unlimited music streaming.

Both represent an exchange of money for services.

Yet the states with high taxes pay more to the government than they receive compared to the states with lower taxes.

This is:

1. Not true of all low tax states (Nevada, Washington, New Hampshire, South Dakota, etc)

2. More representative of which states have the most senior citizens and military bases, because most of the Federal budget goes into Medicare, Social Security, and the military.

3. Better alleviated by directly targeting net-takers rather than trying to approximate which states are net givers and takers based on the state and local tax rates, which is ham-fisted

Mississippi, Alabama, Kentucky , etc have more senior citizens?

Even many of the military bases are just unneeded make-work facilities for civilians. The military leadership has constantly been blocked from closing bases that it said it didn’t need by Congress. There are many military bases that are really just poorly disguised subsidies.

And just so I can’t be accused of quoting sources from the “liberal media”

https://www.militarytimes.com/news/pentagon-congress/2019/08...

Social security and Medicare are also just another form of government subsidizing people.

No, what they paid in doesn’t come close to paying for what they received.

https://www.politifact.com/article/2013/feb/01/medicare-and-...

> Mississippi, Alabama, Kentucky , etc have more senior citizens?

That...wasn't the argument. On average the pattern of "net-takers" and "net-contributors" is a proxy for where senior citizens live because Social Security and Medicare account for over half of the Federal budget. Yes, there are outliers (like Mississippi, Alabama, Kentucky), but there are outliers in the other direction as I pointed out (Washington, Utah, South Dakota, New Hampshire). I addressed this in the final point, that the disparity is:

"3. Better alleviated by directly targeting net-takers rather than trying to approximate which states are net givers and takers based on the state and local tax rates, which is ham-fisted"

> No, what they paid in doesn’t come close to paying for what they received.

None of your sources actually adjust for Medicare/SS/military expenditure.

Military expenditure is often a disguised expenditure to redistribute taxes to states. The military wants to close bases and the civilian leadership won’t allow them because of job loss.

Social Security especially is a method to redistribute taxes. The amount most senior citizens get from SS is much less they put in - even if you account for inflation.

This is factually untrue: https://www.marketwatch.com/story/these-7-social-security-my...

In fact, research shows that accounting for Social Security essentially cancels out the recent increase in inequality: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3546668

Your article didn’t contradict that most people get more than they put in.

https://www.politifact.com/article/2013/feb/01/medicare-and-...

According to the institute’s data, a two-earner couple receiving an average wage — $44,600 per spouse in 2012 dollars — and turning 65 in 2010 would have paid $722,000 into Social Security and Medicare and can be expected to take out $966,000 in benefits. So, this couple will be paid about one-third more in benefits than they paid in taxes.

> In fact, research shows that accounting for Social Security essentially cancels out the recent increase in inequality

Doesn’t that support my point that the higher tax states actually subsidize poorer states?

I’m a bleeding heart capitalist. I believe in the social safety net. But, the entire point of my post was arguing against the idea that states with high taxes and limiting SALT was unfair to states that pay less in taxes.

> Doesn’t that support my point that the higher tax states actually subsidize poorer states?

No, it doesn't, because your statement presupposes that Social Security payments disproportionately go to the poor. In practice, Social Security (and Medicare) represent welfare for the rich. Baby Boomers are the wealthiest cohort in the US[1][2]. (FTA) "For two-thirds of seniors, Social Security has detached from the program’s original mission — to eradicate senior poverty — and is now the world’s most expensive upgrade from Carnival to Royal Caribbean for Nana and PopPop."

While there are poor retirees that benefit from SS/Medicare, they represent the minority of their cohort. On average, retirees are among the richest people in the country owing to a lifetime of accrued earnings (unlike, say, college graduates). So programs like SS/Medicare that target retirees are about the furthest thing from "subsidizing the poor". Consider that Bill Gates, Ariana Huffington, and Warren Buffett all qualify for Medicare and receive SS checks.

SS/Medicare also represent about half of the Federal budget. This is exactly why you need to adjust for those programs, because when you say that the Federal budget overwhelmingly subsidizes "poor low tax States", half of that just goes to old people, who overwhelmingly live in Red, 0-tax states like Florida. It tells us nothing about the fiscal health of those states, nor their dependence on the Federal government. On the other hand, high tax blue states disproportionately suffer from poor fiscal health, owing to under-funded defined benefit pensions that are essentially insolvent.

> But, the entire point of my post was arguing against the idea that states with high taxes and limiting SALT was unfair to states that pay less in taxes.

But once you account for SS/Medicare, the distribution of net-contributors and net-takers does not cleanly correlate with high vs low state and local taxes. This means that it's an extremely inefficient way of handling the inequity. You think it's a problem that some states pay more than they take in? Then address that directly! Don't use state-and-local-taxes as a proxy for that. It's an extremely messy and ham-fisted way of solving that problem.

[1] https://www.bloomberg.com/news/articles/2016-07-12/the-riche...

[2] https://marker.medium.com/lessons-from-iowa-and-the-fallibil...

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