Democrats are scheming to spread the tax misery of blue states nationwide

If you live in Florida or another low-tax state, brace yourself. A bipartisan group of lawmakers from blue states is gearing up to punish you for your state’s fiscal restraint. They want to lift the cap on the federal income-tax deduction for state and local taxes, known as SALT.

If they succeed, middle-class Americans in red states will once again have to subsidize wealthy taxpayers in states such as California and New York, where leaders continue to double down on decades of fiscal mismanagement.

Before President Trump’s 2017 tax reform, the SALT deduction rewarded wealthy residents of high-tax states by reducing their federal taxes, while still giving them the same federal benefits. 

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This is in effect a hidden wealth transfer from less wealthy workers in low-tax states, who don’t get the deduction and have to pay more in federal taxes. 

Capping the deduction at $10,000 was an ingenious way to address that injustice. It protected middle-class households while letting wealthy residents of high-tax states feel the pain of their actual tax liabilities.

Coupled with heavy-handed Covid lockdowns, exposure to the reality of their states’ excessive taxation triggered mass migration. Since then, Florida has gained over a million new residents, while California and New York have each lost a million.

Now, blue-state congressmen of both parties are threatening to blow up President Trump’s tax cuts, which will expire unless extended this year, unless the SALT deduction is reinstated or greatly expanded. That would be a terrible mistake.

Raising the SALT cap primarily benefits the wealthy—households earning $200,000 or more—not the middle class. Middle-class families, who now almost always use the standard deduction, wouldn’t gain a cent.

Who pays the bill for this giveaway to affluent taxpayers? Everyone else. Increasing the SALT deduction creates budget shortfalls that would force higher taxes on the majority or lead to even greater, inflationary deficits. In short, middle-class families nationwide would bear the cost of restoring the abusive SALT deduction. 

Worse still, the SALT deduction undermines competitive federalism—the very foundation of our constitutional arrangement. The genius of the Constitution’s original federal structure, as it existed before the progressive and New Deal transformation of a century ago, was that it forced states to compete for residents and capital by keeping taxes low and regulations minimal. 

Progressives enamored of government deride that as a “race to the bottom.” They have consistently used the federal tax code to sabotage interstate competition, particularly after the 16th Amendment greatly expanded Congress’s taxing power in 1913. In the 1920s, they banded together in Congress to enact a federal estate tax, and then provided that people could deduct their state estate tax liabilities from the federal tax. 

The scheme specifically targeted Florida, which had earlier repealed its estate tax on its way to becoming the nation’s retirement haven. It deprived retirees of the choice between high-tax and low-tax states. Henceforth their choice would be between paying a high estate tax in their state or paying it to the federal government.

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Florida sued, arguing that this scheme amounted to a federal tax on some states but not others. Alas, an increasingly progressive Supreme Court rejected the claim in Florida vs. Mellon (1927).

Today’s SALT advocates from California, New York, New Jersey, and Illinois complain about “double taxation,” yet it is they who routinely double- and triple-tax their constituents. Their real grievance? Trump’s SALT cap made their high taxes transparent to everyone—and politically costly.

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Florida stands to lose a great deal from the push to restore the SALT deduction. It would erode the state’s competitive advantage, forcing it to subsidize fiscal irresponsibility elsewhere, and punishing Floridians for their state’s successful, pro-growth policies. 

The SALT deduction isn’t just welfare for the wealthy. It’s a scheme to spread the tax misery of blue states nationwide. Congress should be thinking about repealing it entirely, not restoring it to benefit the wealthiest. 

The Heritage Foundation is listed for identification purposes only. The views expressed in this article are the author’s own and do not reflect any institutional position for Hertiage or its Board of Trustees.