What the New Tax Bill Means for Your Wallet: Jonathan Williams on American Radio Journal

For Americans rightly concerned about the looming expiration of the 2017 Tax Cuts and Jobs Act—or the Trump tax cuts—the recent effort in Washington to pass one big, beautiful bill by the U.S. House of Representatives offers some incredible wins for taxpayers.

At its core, the effort reduces tax rates on personal income and preserves key provisions for small businesses—measures that are key to economic growth and well-being—and measures that were otherwise set to vanish at the end of the year.

After the TCJA was signed into law in 2017, real median household income rose substantially, unemployment dropped to historic lows, and business investment surged. Repealing those gains would be more than a policy mistake. It would be an economic blow to millions of working Americans. It would mean fewer jobs, lower wages, and higher prices—all while making the United States less competitive globally.

But as always, in Washington, no good idea is safe from political horse-trading.

Enter the renewed push to dramatically expand the State and Local Tax deduction—or SALT—a perennial gift to high-income earners in high-tax states dressed up as relief for the middle class. The SALT deduction has existed, in one way or another, since the federal income tax was first allowed under the 16th Amendment to the Constitution.

An important historical note: let’s not forget, the Founders prohibited the federal government from levying a direct income tax on Americans altogether in the Constitution. The SALT deduction, at least in theory, lets taxpayers deduct what they pay in state and local taxes from their federal tax liability. And at first glance, that might seem fair. But in practice, it has been anything but.

After the passage of the TCJA in 2017, the SALT deduction was capped at $10,000 annually. However, the language recently passed by the U.S. House would make a step backward on the SALT deduction by increasing the cap to a whopping $40,000.

That deduction does phase out for those earning more than $500,000—falling back to that $10,000 cap for the highest earners. Both the cap and the income threshold grow at 1% annually until 2033, based on the House language.

Carveouts such as the increased SALT cap come directly at the expense of hard-earned tax relief for Americans that applies more broadly and neutrally—such as a much more globally competitive 15% business tax rate.

So while politicians in states like New York and California point to SALT as a middle-class benefit, the numbers tell a far different story. SALT is a mechanism for really socializing the costs of big-government policies in a few states across the rest of the nation.

The political incentives are clear enough. Elected officials from high-tax, generally blue states want to shield their constituents from the consequences of their states’ policies—without doing the hard work of reducing spending or reining in tax burdens at the state level.

If residents of New York or California want expensive government services, of course that’s their right. But they should pay for it themselves—directly and transparently. They should not expect working families in Texas or Tennessee or Indiana to subsidize their choices through the federal tax code.

As we point out in our ALEC Rich States, Poor States report every year: one of the most powerful features of the American system is competitive federalism. States are free to make their own policy choices, but they must also live with the results. That’s what drives innovation and discipline.

When a state fails, its people can either demand change or vote with their feet. But when Washington steps in to mask those failures of high-tax states, it removes the most basic form of accountability—and that is competition.

We should all look to strengthen this competitive federalism framework across our country.

The renewal of the Trump tax cuts will protect Americans from a devastating tax increase at the end of the year and will be a powerful influence for economic growth—just as the 2017 tax relief proved to be.

Looking at common-sense ideas like additional tax rate relief and scrutinizing the expanded SALT deduction will be points of debate as the tax reform discussion moves forward in Washington this summer.

Most importantly, the one big, beautiful bill that the U.S. House just passed makes permanent the personal income tax cuts from 2017. The threat of a massive tax increase that would have hit millions of taxpayers and threatened economic recession looks much less likely to occur after the hard work of House Speaker Mike Johnson and his colleagues in the U.S. House.