The Tax Cuts and Jobs Act (TCJA)—passed in 2017 during the first Trump administration—wasn't really a tax cut in practice. It ended up functionally raising taxes on a lot of people.
While it did lower marginal income tax rates across the board, reducing the top rate from 39.6 percent to 37 percent, it also capped the deduction for state and local taxes (SALT) at $10,000 annually. SALT includes income taxes, of course, but also property taxes, so the new cap hit taxpayers in high-tax states like New York, New Jersey, and California particularly hard. Even in states without income taxes, where property taxes are frequently higher, many people saw their tax bills increase because they could no longer fully deduct these expenses.
The result was a significant migration of people and capital, with impacts that will be felt for decades. California is losing 500,000 residents annually (about 1 percent of its population), primarily to states like Idaho, Arizona, and Texas. High-profile moves included Amazon founder Jeff Bezos (who migrated from Washington state to Florida to avoid an imminent capital gains tax designed explicitly for him), and the hedge fund Citadel, which moved its headquarters from Chicago to Miami. Northeastern "tax refugees" have also settled in cities like Nashville, Tennessee, and Austin, Texas. Over time, the migration from blue states to red states could reshape the congressional map, potentially giving red states more influence. (Perhaps this was then-Treasury Secretary Steven Mnuchin's long game.)
The rationale behind capping the SALT deduction was that it would disproportionally benefit high-income earners in high-tax states—and it did. In effect, the federal government was subsidizing the tax-and-spend policies of these states by shielding residents from the full impact of local tax increases. If California raised its taxes, the SALT deduction softened the blow for taxpayers. Mnuchin, along with then-President Donald Trump, hatched the idea, and despite only modest adjustments to marginal tax rates, it became the most consequential tax legislation since Ronald Reagan's Tax Reform Act of 1986.
Last week, economist Stephen Moore, a member of Trump's current economic advisory transition team, told Bloomberg there is a consideration to increase the SALT write-off limit from $10,000 to $20,000. This, Moore said, "would solve the problem for middle-class families in blue states" who got hammered by the TCJA cap on deductions. For example, an affluent household in New Jersey might pay $20,000 in property taxes alone, plus another $10,000 or more in state income taxes. For a household in the 24 percent marginal tax bracket, the change would mean $2,400 in tax savings.
The proposal is laudable under humanitarian grounds, but libertarians should oppose any policy that enables high-tax states to continue their heavy spending. Notably, no high-tax state has reduced its tax rates in response to the SALT-driven migration, and they likely won't until they face a full-scale drain of intellectual and economic capital.
As Trump prepares to take office again, no provision or deduction is off the table, including the possibility of broader tax reforms. There has even been discussion of a flat tax—an idea that could generate significant excitement among fiscal conservatives. But raising the cap on SALT deductions would ease pressure on blue states to simplify or lower their tax rates. Consider that California's top marginal rate is a whopping 13.3 percent. When combined with a top federal rate of 37 percent, Golden State residents are approaching a Sweden-level tax rate. Meanwhile, seven states impose no state income tax at all. This dynamic highlights the beauty of the American political system—the states compete for talent and resources. Over time, high-tax states will lose capital, and low-tax states will benefit.
It's difficult to oppose any proposal that lowers taxes, but an exception applies here. Raising the SALT cap would only reward high-tax states for their fiscal irresponsibility while undermining the competitive pressures that drive reform. Cities like Nashville, Austin, and Miami are thriving as new hubs of innovation precisely because they've embraced freedom and pro-growth policies. They've earned their success—and that's the lesson high-tax states need to learn.
The post Raising the SALT Cap Is a Gift to High-Tax States appeared first on Reason.com.
