Over the next few months, members of the U.S. Congress will answer an important question: Should North Carolinians be forced to pay for bad state tax policies in New York and California?
It sounds ridiculous, but it’s one of the key issues lawmakers in Washington, DC, will tackle as they work to extend a series of big tax cuts created back in the first Trump administration. Most of the proposals under consideration are very pro-taxpayer, including extending low personal rates and the increased standard deduction, increasing the pro-family child tax credit, and freeing most taxpayers from the complicated and duplicative alternative minimum tax that makes some filers calculate their taxes twice and pay the higher amount.
To help pay for all these great taxpayer measures, Congress back in 2017 placed a cap on a tax break that mainly helped rich taxpayers in liberal northern and western states: the state and local tax (SALT) deduction. Over 90% of this tax break went to taxpayers making over $200,000 a year, with over half going to taxpayers taking home over a million dollars in income.
Most importantly, over 90% of the benefits of this deduction went to taxpayers in six states: California, New York, New Jersey, Illinois, Pennsylvania, and Texas. So, basically, taxpayers in North Carolina were subsidizing a tax deduction going to rich people in high-tax states.
Now, a few members of Congress from these left-wing states have proposed significantly raising this cap on state and local taxes, or even getting rid of it altogether. Rather than make their state more competitive by lowering taxes, they instead want you to subsidize their irresponsible spending for projects like free health care and public university tuition for illegal immigrants.
These blue state members of Congress give two reasons why they feel their rich taxpayers deserve this benefit. They believe that all Americans benefit from the state and local services paid for by their heavy government spending, and that they feel that their states pay more into the federal coffers and therefore deserve more federal money going their way.
Both arguments don’t hold much weight. How often does a resident of Fayetteville use the sidewalks of Brooklyn or Chicago? Do their kids ever attend Boston public schools, or receive treatment at a public hospital in San Francisco? Probably not that often.
Services provided by state and local governments reflect the interests of the voters that vote for the leaders of their governments, and the services provided are consumed almost exclusively by residents in those jurisdictions. While some residents will move to different jurisdictions, this by itself should not create an expectation that a resident of Wilmington should help subsidize street signs in Times Square.
The other argument provided by these blue state members of Congress holds even less water. They claim they send more money to Washington, DC, than other states, so the residents should get a special tax break. Federal taxes are not assessed on states; they are assessed on taxpayers in those states using rules that are the same across all the states. If someone makes more money, then he will likely pay more federal taxes. Many of these blue states have more rich people living there than other areas of the country. Good for those individuals who are doing well financially. Congratulations! But that does not mean they should get a tax break for choosing to live in high-tax states since they provide a basket of government services that they prefer. Neither the federal government nor other states owe them any extra funds because of their success or their choice of residency. These taxpayers are just paying their fair share.
Meanwhile, residents of states like North Carolina, with more modest budgets and lower tax rates, would receive less benefit, widening the fiscal disparity between states. Even worse, lifting the cap could encourage further fiscal irresponsibility by allowing high-tax states to continue their spending habits without fixing underlying budget issues.
As Congress pieces together the “one big beautiful” tax bill, it’s important that states like North Carolina aren’t left holding the bag for the bad policies of New York, California, New Jersey, and other fiscally mismanaged states. Congress should keep the SALT deduction capped.
