Brandt Hershman: When is a tax cut a bad idea?

When is a tax cut not really a tax cut? An issue currently contemplated by Congress might make Hoosiers’ tax burden a little “SALTier” come next April.

Taxes and spending have historically been viewed as two separate activities. But a growing idea of viewing tax credits and deductions as expenditures is gaining traction in state capitals and the halls of Congress.

Indiana is recognized as a national leader in tax policy and has been specifically honored by the Pew Foundation for its work in tax-expenditure analysis. We have engaged in a systematic, nonpartisan and ongoing review of the value and effectiveness of the various tax credits Indiana offers.

For example, Indiana had a long-standing tax credit to encourage the installation of home insulation aimed at promoting energy savings. A detailed economic analysis revealed that the value of the tax credit to an individual was so small that it was unlikely to encourage anyone to insulate—the value of the energy savings was a far greater incentive than the credit.

The credit was costing the state millions in forgone revenue. The General Assembly determined Hoosiers would be better served by eliminating the credit and putting the additional tax revenue into grants to promote insulation by low-income homeowners who could not otherwise afford to do so.

Hoosier lawmakers realized that tax deductions and spending are both expenditures in the long run. Both spending and tax cuts have their place but need to be viewed in terms of their ability to achieve clear policy objectives. Education spending is important, and so are low tax rates that encourage economic development and job creation.

An argument about the underlying value and policy objective of a long-standing tax credit is currently taking place in Washington over what is known as the SALT cap. Before the Trump tax cut, taxpayers could deduct all state and local tax payments on their federal income tax return. While the initial goal might have been to reduce overall tax burden, the resulting benefits were wildly unequal, with people in high-tax states receiving far greater federal tax relief.

The Trump tax reform package limited the SALT deduction to $10,000, which had little to no impact on taxpayers in low-tax states like Indiana, where residents’ state and local taxes rarely exceeded $10,000, but infuriated taxpayers in high-tax states like California, New Jersey and Illinois. Now, members of Congress from those states are looking to reinstate the full deduction. The impact would be a $600 billion shift over 10 years—onto either the federal deficit or the backs of taxpayers in states like Indiana.

By allowing full deductibility, the SALT deduction would substantially reduce the federal tax burden of wealthy individuals in high-tax states. Assuming the size of the total budget is not reduced to account for the lost revenue, the deduction amounts to a tax expenditure that either increases the budget deficit or is paid for by taxpayers in low-tax states.

My view is that, if people don’t like paying high state and local taxes, they need to change their state and local legislators, rather than look for a bailout from fiscally responsible states through federal tax sleight of hand.•

__________

Hershman previously served in the Indiana Senate. He currently serves of council in the federal practice group of Barnes and Thornburg LLP in Washington, D.C. Send comments on this column to ibjedit@ibj.com.

Click here for more Forefront columns.