Federal tax reform: Eliminating state and local deduction would hit Minnesota hard

All the talk in Washington about tax reform can quickly get complicated. Pick up the paper or watch cable news and it won't be long until you start hearing about tax brackets, effective tax rates, burgeoning federal budget deficits and stories of wealthy folks and big companies working the system until they're paying hardly any taxes at all.

These stories might be interesting, but if you look past the noise, there's another story lurking behind the scenes. Here in Minnesota, a state that prides itself on high-quality state and local services, we would be foolish to ignore it.

The story involves state and local taxes, often referred to as SALT. These taxes have been deductible on federal tax returns since the federal income tax was first imposed in 1913.

This system was designed to ensure that taxpayers aren't forced to pay federal taxes on top of state and local taxes they're already paying. It also was designed to protect the fiscal systems that support the services that state and local governments provide and our system of federalism. But under the Republican tax plan, all of that would change.

The SALT deduction is the most popular deduction and overwhelmingly benefits middle-class taxpayers. Among the 44 million households nationwide that claim the SALT deduction, nearly 86 percent have incomes under $200,000.

The same is true across our metro area. According to the National Association of Counties, 83 percent of the 333,000 households in Hennepin and Ramsey counties that take the deduction have incomes less than $200,000. Individuals and families in Ramsey County take an average deduction of $12,890; in Hennepin County, the average deduction is $17,694.

Under the current House proposal, middle-income taxpayers in both of our counties and across Minnesota would take a substantial hit. By breaking down IRS data to the zip code level, we can see how a family of four in one part of Hennepin County making $87,000 would face a 6 percent tax increase. A similar family in Ramsey County making $62,000 would see a 4.4 percent increase.

Any legislation eliminating some or all of SALT would hurt the middle class and the thousands of homeowners who support local services in our communities. Even proposals that preserve deductions for some types of local taxes but not others would squeeze state and local budgets, forcing increased taxes or harmful cuts to services.

This can all feel academic until you think about how it would really affect people's lives. And the impact on families' personal budgets would just be the beginning.

Eliminating the SALT deduction would ultimately lead to greater budget challenges at the local level. The result is basic economics: A loss of the SALT deduction would lead to increased pressure on state and local governments to lower tax rates — citizens would be unhappy with higher federal tax bills and would look for tax relief from local governments. Of course, that pressure could lead to declines in local tax revenue, which would further constrain counties, cities and school districts' ability to provide the essential public services we all rely on.

The losses would be significant and real: Think of the roads, schools, public safety work, human services and so much more. The elimination or rollback of SALT at a time when federal revenues are sharply curtailed by corporate tax cuts would likely result in fewer federal investments in services at the state and local levels. And ironically, corporations would retain the deductibility of state and local taxes.

In Hennepin and Ramsey counties, we've invested in things like jobs, health care and transportation because it helps us build a better future for our children. We know that now is not the time to turn back the clock on our progress.

That's really what's at risk if the SALT deduction is eliminated or reduced: not just one family's tax bill, but the essence of what makes our communities thrive.

Peter McLaughlin is a Hennepin County commissioner. Jim McDonough is a Ramsey County commissioner.