|
 President Donald Trump has said a
key priority for his tax reform plan is to cut taxes for America’s middle-class
families.
However, Trump desperately needs to generate enough revenue to finance his
proposed tax cuts. And ending the state and local tax, or SALT, deduction is a
key component of the president’s original tax reform plan.
The SALT deduction allows households to deduct state and local taxes on their
federal returns. A plan to remove the deductibility would disproportionately
harm individuals who live in states with a high overall state tax burden, such
as Illinois. This is because removing deductibility raises the federal income
tax burden by the value of the tax bill due to the state.
In some of Illinois’ counties, the average gain from the SALT deduction is over
$5,000 a year, according to the Tax Foundation. But that benefit could vanish if
Trump’s tax reform plan comes to pass, costing Illinois households thousands.
 An increase in the overall tax burden faced by Illinoisans would have a
disastrous impact on Illinois’ economy. This is because an increase in the tax
burden further constrains households and businesses, thus discouraging economic
activity. In addition, a higher tax burden raises the benefits to be gained from
moving toward states with lower tax rates.
Illinois is already experiencing capital flight. According to Internal Revenue
Service data, Illinois is already losing higher-earning residents to
out-migration. A consequence of these outflows of labor and capital is state tax
revenues suffer as the tax base shrinks. This exodus has had disastrous effects
on the state’s budget. Eliminating the SALT deduction would only make this trend
worse – as the full effect of Illinois’ high state and local taxes is truly
felt.
[to top of second column] |
But if state lawmakers
pre-empt the possible elimination of the SALT deduction with tax
cuts that improve Illinois’ competitiveness relative to other
states, the president’s plan can trigger large inflows of capital to
Illinois that would grow the state’s economy.
Competitive tax cuts grow the tax base, raising additional public
funds without further harm to the average household. As a result,
government programs that help the less fortunate can be better
funded in a more competitive low-tax regime.
Fiscal solvency is a symptom of tax competitiveness while insolvency
– as in Illinois’ current fiscal state – indicates a lack thereof.
The bulk of evidence suggests tax hikes shrink the tax base while
tax cuts grow the tax base and improve economic conditions for
everyone.
Illinois lawmakers concerned about fiscal solvency are at a
crossroads. They can adopt competitive tax policies that will curb
capital flight, eventually reversing a negative trend at the expense
of other high-tax states, or they can do nothing.
If lawmakers do nothing, the elimination of the SALT deduction, if
implemented, will result in further erosion of Illinois’ tax base.
Click here to respond to the editor about this article
 |
