The Trump Administration has reportedly gone back to the drawing board to decide how to approach tax reform, scrapping the candidate’s supercharged supply-side campaign platform and mulling a variety of more unorthodox ideas. Among them, according to Axios‘s Jonathan Swan, is capping or eliminating the state and local tax deduction, which disproportionately benefits people earning over $200,000—especially those in high-tax blue state metropolitan areas like New York City, and Chicago and San Francisco.
This is a savvy move by Trump’s economic advisers. Capping the SALT deduction offers a path to raising revenue without raising rates and thus distorting incentives further. As Reihan Salam has suggested, the new revenue could be used to pay for a sizable tax cut for working and middle-class families. This would amount to a transfer of resources from a loyal and well-heeled Democratic constituency—blue state professionals—to Trump’s (what are elections about if not delivering benefits to your voters?) even as it puts Democrats in an awkward position if they decide to go to the wall to protect what amounts to a regressive tax subsidy for high-earners.
But putting aside the national politics and budgetary considerations, reducing the federal write-off for state and local taxes could help improve state governance as well. One reason states like California and New York are in such dire fiscal shape, and so beset by special interests obstructing reform, is that their talented high-earners don’t have much of a stake in improving their quality of governance. Albany and Sacramento can degenerate into kludgeocracies that demand bigger and bigger revenue streams to pump into failing schools or top off public sector worker pensions and the business elite in Hollywood or on Wall Street don’t need to worry—thanks to SALT, they won’t see as much as 40 percent of tax hikes handed down from statehouses and city halls. Capping this deduction would give a new urgency to the blue state government reform project among people with the power to actually make a difference.
In other words, putting SALT on the chopping block is a win win win, as far as the GOP is concerned—it raises revenue in a way that is relatively inoffensive to Republican voters, it helps pay for the tax cuts Trump has promised, and it will lean on blue states and cities to reform in a way that improves the quality of governance overall. It would be negligent of the White House—as a matter of politics and policy—to put forward a tax reform package that keeps SALT intact.