Editorial Staff

Study Finds SALT Deduction Cap, Graduated Income Tax Will Combine to More Than Double Tax Burden on Some Households

/in , , , , /by Editorial Staff
Share on Facebook
Share on Twitter
Share on
LinkedIn
+

BOSTON – A provision of the federal Tax Cuts and Jobs Act of 2017 strictly limiting deductions for state and local taxes (SALT) will greatly exacerbate the adverse effects of a proposal to create a constitutionally mandated graduated income tax, according to a new study published by Pioneer Institute.

Before tax year 2018, Americans who itemized deductions were able to write off the full value of the state and local taxes they paid from their federal tax return. Under the Tax Cuts and Jobs Act of 2017, however, only the first $10,000 paid in state and local taxes are eligible for deduction, which resulted in a year-over-year 80 percent decrease in the total amount of SALT deductions claimed.

“The 2017 federal curb on SALT deductions has already exposed small businesses and retirees to the full force of state tax policies in blue states like Massachusetts,” said Greg Sullivan, who co-authored The SALT Cap: An Accelerator for Tax Flight from Massachusetts with Andrew Mikula and Liv Leone. “The proposed tax would double down on small businesses and retirees, with the effect of lessening business investment, lowering home values, and producing fewer jobs.”

The Massachusetts Department of Revenue estimated that the average Massachusetts taxpayer subject to the surtax in 2019 would see a 58.2 percent increase in state income taxes. But when the SALT deduction cap is factored in, Massachusetts taxpayers with incomes of $1 million or more will see an increase of 147.5 percent in their average state income tax payment net of the federal tax deduction benefit, from $101,295 to $250,655, because of the combined effect of the SALT cap and the surtax.

While Congress has debated repealing the SALT deduction cap in recent weeks, doing so will likely agitate both progressives, who argue that the SALT deduction largely benefits the wealthy, and conservatives, who question why the federal government should bail out people who choose to live in high-tax states and cities.

While Massachusetts has passed legislation to offset the impact of the SALT limitation at the federal tax level, this workaround does not change the amount of taxable income a pass-through entity is responsible to report to its members as their proportionate share of taxable income at the state level. Thus the workaround tax credit is not relevant to the impact of the proposed graduated income tax amendment in Massachusetts.

When New York passed a millionaires’ tax in April that is similar to the Massachusetts surtax proposal, seasoned economist Larry Summers warned that, without a repeal of the SALT deduction limitation, the legislation could send the Empire State into “a downward spiral.” This likely alludes to the economic impact of the tax base erosion, revenue volatility, and disinvestment associated with such tax increases.

“Massachusetts lawmakers either did not understand the many ways in which the graduated income tax amendment will harm our competitiveness or they chose, because of political expediency, to ignore those impacts,” said Pioneer Institute Executive Director Jim Stergios. “The SALT cap and other limits on itemized deductions will make the graduated income tax an albatross around the neck of the Bay State’s job creators and investors.”

About the Authors

Gregory Sullivan is Pioneer’s Research Director. Prior to joining Pioneer, Sullivan served two five-year terms as Inspector General of the Commonwealth of Massachusetts and was a 17-year member of the Massachusetts House of Representatives. Greg holds degrees from Harvard College, The Kennedy School of Public Administration, and the Sloan School at MIT.

Andrew Mikula is a former Economic Research Analyst at Pioneer Institute and current candidate for a Master’s in Urban Planning at Harvard University.

Liv Leone is a Research Associate at Pioneer Institute. Liv holds a bachelor’s and a master’s degree in political science from Boston University. Joining Pioneer in 2021, she conducts research with data from MassEconomix, and supports Pioneer’s fields of research, including taxation and regulation.

About Pioneer

Pioneer’s mission is to develop and communicate dynamic ideas that advance prosperity and a vibrant civic life in Massachusetts and beyond. Pioneer’s vision of success is a state and nation where our people can prosper and our society thrive because we enjoy world-class options in education, healthcare, transportation and economic opportunity, and where our government is limited, accountable and transparent. Pioneer values an America where our citizenry is well-educated and willing to test our beliefs based on facts and the free exchange of ideas, and committed to liberty, personal responsibility, and free enterprise.

Get Updates on Our Economic Opportunity Research

Related Posts:

Zoning Reform Revisited: Local Control Determines How, Not If, Housing Gets Built

Hubwonk host Joe Selvaggi talks with Pioneer research associate Andrew Mikula about the need for affordable housing near the mass transit network and the requirements and local design opportunities of the 3A zoning reform law. Read Pioneer Institute's recent public comment on this topic.

Evan Silverio Builds Upon Immigrant Mother’s Business Success

This week on JobMakers, host Denzil Mohammed talks with Evan Silverio, child of immigrants from the Dominican Republic, President and CEO of Silverio Insurance Agency, and founder of Diverse Real Estate, both in Lawrence, Massachusetts.

Abul Islam Helps Rebuild America’s Infrastructure

This week on JobMakers, host Denzil Mohammed talks with Abul Islam, immigrant from Pakistan and founder, President and CEO of AI Engineers. AI Engineers is a Connecticut-based consulting firm that builds and rehabilitates bridges, transportation systems and building systems throughout the U.S. Since 1991, Abul has created nearly 1,000 jobs and today leads a $50 million company. 

Roger Magalhaes Goes from Truck Driver to Industry Leader

This week on JobMakers, host Denzil Mohammed talks with Roger Magalhaes, immigrant from Brazil and founder of the firms Shades in Place window treatment installation and Trading Up Consulting, in Franklin, Massachusetts.

Rent Control Redux: Mayor’s Committee Likely to Provide Astroturf Over Expertise

Hubwonk host Joe Selvaggi talks with Doug Quatrocchi, executive director of Masslandlords.net about the historical effects of rent control in Boston and Cambridge in the past and discuss the gap between the stated goals and the likely outcome of Boston Mayor Wu’s 25 member Rent Stabilization Advisory Committee.

Avak Kahvejian on How Immigrants Drive Innovation

This week on JobMakers, host Denzil Mohammed talks with Dr. Avak Kahvejian, an inventor, entrepreneur and CEO as well as general partner at Flagship Pioneering, a life sciences venture capital company in Cambridge, Massachusetts.

Dr. Celina Miranda on Immigrant Entrepreneurs & Community Uplift

This week on JobMakers, host Denzil Mohammed talks with Dr. Celina Miranda, executive director of the Hyde Square Task Force in Jamaica Plain’s Latin Quarter, today one of the most diverse neighborhoods in Massachusetts.

Study: Legislature Likely to Reduce Spending on Education and Transportation from Other Revenue Sources, Replace Cuts with Surtax Money

Revenue from a ballot initiative to amend the state Constitution and raise income taxes on households and businesses by adopting a graduated income tax structure would supposedly provide resources for transportation and public education, but a new study published by Pioneer Institute finds that, were the tax amendment to pass, the money would be fungible and much of it likely spent on general budget measures.   

Theresa Park on How Immigrants Revitalize U.S. Cities

This week on JobMakers, host Denzil Mohammed talks with Theresa Park, Deputy Director and Senior Executive Vice President at MassDevelopment, a group that offers financing and real estate solutions to drive economic growth across Massachusetts. An immigrant from Korea who moved to Lawrence, Massachusetts, Theresa saw first-hand how immigrants built their lives from the ground up, and in so doing brought economic and cultural vibrancy to their new home cities.

Reinier Moquete on the Audacity of Immigrant Entrepreneurship

This week on JobMakers, host Denzil Mohammed talks with Reinier Moquete, son of immigrants from the Dominican Republic and founder of CyberWarrior, a cyber security services provider in Boston, Massachusetts.