Republican lawmakers have reportedly reached a deal to preserve the deduction for state and local property taxes while repealing the deduction for other state and local taxes as part of their proposed tax overhaul. The compromise is apparently intended to win the support of House Republicans from high-property-tax states like New Jersey and New York, who think that the deal is a good one for middle-class homeowners in their districts. But as Jed Graham points out in a nice article at Investors.com, preserving the property tax deduction as part of the Republican plan might have negative consequences for the very people that it’s intended to help. (I’m admittedly biased because the article cites and quotes me.)
As Graham observes, keeping the property tax deduction while repealing the rest of SALT will lead some states to shift from taxing income to taxing property. (Co-blogger Brian Galle has a nifty paper that uses a 2004 change in the federal deductibility of state and local sales taxes to show how subnational jurisdictions respond to the incentives generated by the federal tax code.) This isn’t to say that states with income taxes will repeal them outright — and some states, like California, will be constrained by constitutional limits on property tax increases. But we can probably expect to see at least a modest shift from income taxation to property taxation at the state level, as well as a shift from income taxation to property taxation at the local level in cities and counties that now tax income.
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