There's been quite a bit written about how ending the State and Local Tax (SALT) deduction will disproportionately harm the affluent, high-tax Blue states.
And that's certainly true.
But eliminating the SALT deduction does something even worse.
It's not news that many state and local taxes are regressive, but an example is useful to make that concrete.
It's not unusual for a middle-class taxpayer to have a home with a value of three times their income. Suppose the local property tax is 1%. Then that means the middle-class taxpayer pays about 3% of their income each year in property tax.
Now consider Bill Gates. He has a heckuva house, 66,000 square feet. In 2009 it was reported to have a value of $147.5 million. Suppose he paid the same 1% (actually, it appears he negotiated a reduced rate). Then he'd pay an annual tax of $1.475 million (he pays less).
$1.475 million sounds like a lot, but remember that Bill Gates' effective income has been on the order of $2 *billion* a year. That means he is paying less than 0.1% of his annual income on property taxes.
The middle-class taxpayer is paying a rate, relative to their income, about 30x what Bill Gates is paying.
This is true in general when you look at the middle class and the wealthy: the middle class pays a much higher property tax rate (relative to income) than do the wealthy. That's because there's a practical limit on what almost everyone would spend on a house, because at some point adding the 151st guest bedroom just doesn't make the house any more useful.
The same is true of sales taxes and automotive taxes. Bill Gates earns infinitely more than most of us, but he uses about the same amount of toothpaste. His cars are probably fancier than owned by most middle-class folks, but it would be a bit surprising if he had spent more than 100x more on his vehicles -- while our incomes are far more different than that. There’s just a practical limit to how many or how expensive of vehicles that almost anyone would want.
In all those cases, Bill Gates is going to be paying a *much* lower fraction of his income on state and local taxes than a member of the middle class.
About the only case where the wealthy will pay their "fair share", so to speak, will be states that have an income tax that becomes steeply progressive at incomes well above typical middle-class incomes.
So, coming back to the proposed elimination of the SALT deduction. Washington doesn't have an income tax, so Bill Gates is only trivially affected by ending the deduction. But things are different for the middle class: because state and local taxes are a noticeable fraction of our income, ceteris paribus ending the SALT deduction will noticeably increase our taxes.
Wealthy unaffected, middle class nailed. Welcome to an even more regressive overall tax regime than we currently have. What a gift to the extremely wealthy!
And income inequality in America notches upward again.