
A major issue in the debate over the Republican tax cut bill is whether the deduction for state and local taxes (the SALT deduction) should be eliminated or reduced. The conference committee bill released on Friday proposes a “compromise” that would allow individuals to deduct up to $10,000 in some combination of state and local property and income or sales taxes.
That compromise is deeply problematic for Pennsylvania and many Pennsylvanians, in two different ways.
First, substantial numbers of upper middle-class Pennsylvanians will see their taxes go up as a result of the limitation on state and local tax deductions in the conference committee bill. These taxpayers are likely to be concentrated in the suburbs of Philadelphia, where a high percentage of taxpayers take the state and local deduction.
Second, the state as a whole will suffer because the limitation on the state and local tax deduction will make it more difficult for the state to raise taxes. This is a serious issue, especially at a time when the state suffers from both recurring budget deficits and a deep public investment deficit and yet there is little political will in the General Assembly to raise taxes.
We consider these two problems in order after the break.