What the state and local tax deduction fight is really about.
As congressional Republicans prepare their tax-cut bill (and President Trump negotiates provisions on Twitter), the deduction for state and local taxes (SALT) has become a flash point. Last week, the Senate approved an amendment to abolish the deduction, which especially would benefit residents of states with stiffer state tax bills and higher property values.
Hailing elimination as tool to offset some of the huge rate cuts Republicans seek on corporate incomes and high earners, House Speaker Paul D. Ryan (Wis.) asserted that SALT unfairly subsidizes “big government states” and creates a situation in which “states that actually got their act together pay for states that didn’t.”
Defenders of the deduction, including Republicans from states such as New York and New Jersey, counter that even after the deduction, their states pay far more in federal taxes than they receive in federal spending. By that standard, wealthy populous blue states such as California subsidize less developed mostly red states. South Carolina, for example, despite its long history of opposition to the federal government, takes nearly $4 in federal spending for every dollar its citizens pay in federal taxes.
At its core, the debate over the SALT deduction reflects a fundamental disagreement about the nature of American public life. Are the states “with their acts together” the ones that keep taxes lowest or the ones that provide good schools, safe roads, the best job opportunities and the highest incomes?
For example, my home state of Massachusetts would be a big loser under the Trump tax blueprint (full disclosure: The repeal of the SALT deduction probably would increase my tax bill). Does Massachusetts have its act together? Well, it ranked No. 1 in the latest US News Survey of educational quality (Ryan’s Wisconsin finished 17th, and South Carolina was at the bottom) and No. 4 on the list of best states for employment (Wisconsin follows at No. 12 and Trump-loving West Virginia finishes last).
For nearly 80 years, poorer, low-tax states — where anti-government ideology and hostility to Washington, D.C., have generally flourished — have benefited disproportionately from federal spending.
Of course, competition among states and regions did not begin in the 1930s and 1940s. The Constitution built these tensions into the nation’s DNA: creating separate houses of Congress, protecting the interests of slaveholders, providing for federal control over western lands. But not until the New Deal did government outlays reach anything like modern levels (as a percentage of gross domestic product) and not until World War II did the federal income tax affect most Americans (as late as 1939, four-fifths of all American didn’t even file a return).
But as federal spending surged, the parameters of that competition began to change. In the 1940s and 1950s, representatives of the nation’s poorer sections, led by southern members of Congress, reframed their historic antipathy to federal involvement in their affairs and challenged the traditional pattern for apportioning federal spending.
Before World War II, federal grants favored larger, wealthier, more urban states. By distributing funding on the basis of population and requiring states to match federal contributions, grant programs discriminated in favor of the haves. This meant the poor, low-revenue states of the South and inland West received smaller shares of the federal pie.
As federal spending took off in the 1930s, southerners pushed to reform the system to bring more federal aid to their region. President Franklin D. Roosevelt generally approved of this push for more equal spending, so new formulas gradually found their way into many federal programs. Such provisions became so prevalent that, by 1962, the relationship between state income and grants had reversed itself and slightly favored poorer regions such as the South.
Highway construction likewise benefited less developed, low-tax states. In 1956, Texas Sen. Lyndon B. Johnson championed a law that apportioned 90 percent of the cost of an extensive system of super-highways to the federal government. Since states had to pay only 10 percent of the cost — rather than the traditional 50 percent — poorer states eagerly participated. As a result, the federal government injected billions of dollars of highway funding into the South, while building the roads that would enable the region to modernize.
The flood of federal money into the emerging Sunbelt — provided by states in the Northeast and the industrial Midwest, the regions that paid the most federal taxes — grew so pronounced that it became the subject of heated debate during the 1970s. Amid the stagflation that gripped the world economy, the Sunbelt boomed while the old industrial heartland faced almost catastrophic decline. Northern leaders blamed the decline of the Rust Belt on the imbalance in the distribution of federal development money. Business Week even ran the story, “The Second War Between the States.”
This battle was fought not over slavery but over government largesse. And it was a high-stakes fight, with the health of vast regions of the country at risk. If federal spending was not redirected northward and the decline of the Rust Belt reversed, it would become, in the words of New York Gov. Hugh Carey, “a great national museum” where tourists would “see industrial plants as artifacts” and visit “the great railroad stations where the trains used to run.” (If that seems like an exaggeration, then you’ve never visited tourist attractions such as New York’s South Street Seaport and St. Louis’s Union Station.)
The grievances peaked in the mid-1970s when Carey and his colleagues in northern states formed the Coalition of Northeast Governors to lobby Washington for more generous aid. At the same time, the Midwest-Northeast Economic Advancement Coalition, a caucus of about 200 House members, formed with the goal of redirecting federal money north. “Like blacks, Hispanics, women and homosexuals,” one New Yorker complained in 1976, “Northeasterners are an oppressed minority. We are only beginning to realize how badly the federal government discriminates against us.”
Silly as it was, that comment contained an essential truth. For 80 years, residents of the populous, high-tax (and today mostly blue) states have subsidized their fellow citizens in lower income, lower tax (and today mostly red) states. Ryan and other advocates of SALT elimination portray the deduction as an unfair burden imposed by spendthrift regions on better functioning states. But in fact, congressional Republicans’ plan to eliminate the SALT deduction is the latest battleground in this long-running regional conflict over the federal balance of payments — one that has, paradoxically, showered federal largesse most lavishly on the opponents of big government.
Bruce J. Schulman is Huntington professor of history at Boston University.