‘There Are No Yachts in Falls Church’: Debate Over State and Local Tax Deduction Flares

Local government officials made a case to U.S. House lawmakers on Tuesday that the recently imposed cap on a federal deduction for state and local taxes is hurting their communities.

These claims elicited pushback from Republicans, who countered that restoring the so-called SALT deduction in full would mainly be a boon to wealthier Americans. The GOP lawmakers also suggested lower state and local taxes might help alleviate pain for taxpayers.

The local officials testified on Capitol Hill a day after the nonpartisan Joint Committee on Taxation released estimates showing that if the cap were repealed, about $40 billion of the $77 billion in reduced tax liability in 2019 would benefit people earning $1 million or more.

People with $100,000 to $500,000 of income would see about $22 billion of the tax savings. Overall about 99% of the decrease in tax liability would accrue to people earning $100,000 or more, according to the committee’s analysis.

GOP lawmakers included the $10,000 cap on the SALT deduction household taxpayers can claim in the sweeping tax overhaul that President Trump signed into law in late 2017. 

Limiting the deduction provided upwards of $600 billion over a decade to help pay for other parts of the package, including tax cuts for corporations and individuals. But the cap has proven to be one of the law’s more controversial provisions. 

Elected leaders from Democratic-leaning states with higher taxes, like Connecticut, New Jersey and New York, describe it as unfairly targeting their taxpayers, and have noted that their states send an outsized amount of tax dollars to the federal treasury compared to their peers.

New York and other states have sued the federal government over the cap. And the Treasury Department recently issued rules to block certain policies that state lawmakers moved ahead with to offer to their residents a way to get around the $10,000 limit.

There are bills with mostly Democratic support in both chambers of Congress to restore the deduction. But there so far have been no signs that the Republican leadership in the Senate has any interest in taking up such a measure.

In the meantime, the debate and political theater surrounding the cap grinds on.

“The perception that the SALT deduction cap is only affecting wealthy families is false,” said Bob De Natale, mayor of Bayville, New York, a village on Long Island. 

He said that overlapping local taxes in the village can mean that “the average modest home” has a total tax bill of about $20,000, while the median income for a family is $77,800. (Census Bureau figures peg the median household income at $102,000 for 2013 to 2017).

The number of homes listed for sale in the village is up 30% compared to 2017, said De Natale, who described himself as a Republican and said he voted for Trump.

Bayville may soon have to decrease taxes to reduce pressure from the SALT deduction cap, which in turn would have a “devastating impact” on services, he added.

Research from earlier this year didn’t find signs that people were fleeing higher tax states due to the SALT deduction cap. But experts caution that because 2018 was the first year people filed their taxes with the cap in place, it’s still hard to know what its effects will be.

About 64% of households paid less in individual income tax for 2018 than they would have under the prior federal tax code, while about 6% paid more, according to the Urban-Brookings Tax Policy Center.

David Tarter, mayor of Falls Church, Virginia, located outside of Washington, D.C., told lawmakers that his city of 14,700 has to provide a wide range of services, like schools, parks and police, without the same economies of scale that larger jurisdictions enjoy.

The property taxes are “formidable” as a result, he said, totaling around $11,000 annually for someone with a home that costs the local median of $825,000—a sum he said was likely to get a homebuyer not a mansion, but a brick rambler-style house built in the 1950s.

Tarter emphasized that while incomes in the city may appear high, living costs are too. One reason residents, many of whom are federal workers or in the military, choose to live there and bear the taxes and other costs, the mayor said, is the quality of the local schools.

“There are no yachts in Falls Church, just lots of hardworking families trying to get by in a high rent district,” Tarter added.

But U.S. Rep. Tom Rice, a South Carolina Republican, wasn’t sympathetic to the plight Tarter and others were describing. “What you’re presenting here is a false narrative,” he said. 

“It’s just fascinating to me that the folks on the other side of the aisle try to paint this picture they’re for the working guy, they’re for the downtrodden,” Rice added.

He said some of the areas he represents are rural, predominantly African American, have high poverty rates and would not benefit from restoring the full SALT deduction. Rice suggested that these constituents could even end up paying higher taxes if the full deduction were restored.

“How do I go home and explain to my rural African American folks that they should subsidize housing in Fairfax, Virginia?” Rice asked. “They already subsidize that by paying taxes because tax dollars go to pay these people that live in your community, they’re federal employees.”

U.S. Rep. David Schweikert, an Arizona Republican, said the discussion taking place around the SALT deduction on Tuesday was one of “wealthy jurisdictions” defending their interests.

“If we want to have an honest conversation about distributional curves on taxes, that would be fascinating, but that would require a very different level of intellectual discourse,” he added.

U.S. Rep. Jodey Arrington, a Texas Republican, meanwhile, referencing a quote from the Federalist Papers, suggested to the local officials they should consider whether they are “confining within proper and moderate bounds” the taxes they are levying.

“To say that Washington isn’t giving your folks a fair shake, I don’t know that their local leaders are giving them a fair shake if the taxes could be reduced,” he added.

In contrast, U.S. Rep. Bill Pascrell, a New Jersey Democrat, and a former mayor, blasted the SALT cap, saying he’d “never seen such punitive tax policy.”

“It was literally designed to pit states against each other,” he said.

“There are those who say SALT is for the rich, I say that’s 100 percent poppycock,” he added. 

Pascrell said that every county except for one in New Jersey has had an average SALT deduction over the $10,000 cap, with 80% of those households making under $200,000. 

He also pointed out that a bill he’s sponsoring to bring back the full deduction would restore the top individual income tax rate to 39.6% from 37% to help offset the cost of the policy change.

Christian Leinbach, a county commissioner from Berks County, Pennsylvania, who testified on behalf of the National Association of Counties, attempted to frame the debate around the SALT deduction as one that was not about winners and losers, or blue and red states.

The deduction’s roots, Leinbach said, can be traced to the Civil War era and the origins of the modern federal income tax ushered in by the 16th Amendment, ratified in 1913.

“In both cases,” he said, “there was a fundamental understanding that taxing dollars already paid was double taxation.”