One of the more controversial components of the GOP Tax Act, which affects all federal income tax returns filed between 2018 and 2025, is the $10,000 state and local tax deduction limit. The act limited the itemized deduction for SALT — state income taxes or sales taxes, property taxes and personal property taxes — to $10,000, or $5,000 on the returns of married couples filing separately.
States with high income and property taxes have passed ways to allow their residents to legally cheat on their federal income tax returns and “work around” this limit. Some attempts have been successful and some have failed.
As the Democrats work to put together economic and budget legislation, the SALT limit is high on the list of the items being looked at.
I oppose the $10,000 SALT limit — but for a unique reason.
The Internal Revenue Code taxes Americans based on income measured in pure dollars. However, it is a fact that the “value” of your level of income differs, sometimes greatly, based on where you live. A family living in the Northeast or California that has an income of between $100,000 and $200,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on the same level of income. Many of the items on the Form 1040, and the tax rates, are indexed for inflation, but nothing is indexed for “geography.”
It costs a lot to live in New York, New Jersey, Connecticut, Massachusetts, and California. State and local income and property taxes there are among the highest in the country. As a result, one must earn a lot more money to be able to live in these states — and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in my former home town of Jersey City, New Jersey, as it is in Mobile, Alabama.
The average property tax paid by a homeowner in New Jersey is $8,362. The average property tax in Alabama is $587. New Jersey taxes “gross income” and has very few deductions. The New Jersey state income tax rates go from 1.4% to 10.75%. The Alabama state income tax return for the most part follows the federal 1040 format and allows adjustments to income and a standard deduction or itemized deductions. Alabama’s state income tax rates go from 2% to 5%.
Rent is also much higher in the Northeast, California and other high-taxed states. One reason is because property tax is a factor in calculating rent. The State of New Jersey, certainly a very highly taxed state, provides a deduction, or credit, for property taxes on its state income tax return. But the deduction is not limited to homeowners; tenants can claim 18% of their rent as property tax. The average amount paid for rent in New Jersey is $1,334 per month. In Alabama the average monthly rent payment is $792. It makes sense to me to also include a percentage of rent paid by tenants in the federal Schedule A deduction for property taxes.
Since we pay taxes on “net income” after deductions, allowing an itemized deduction for the full amount of state and local taxes, with a percentage of rent treated as property taxes, would help to somewhat geographically “equalize” the tax burden.
