As I’ve noted previously, requiring people to pay taxes on money that legally belongs to someone else makes no sense from an economic perspective. You might as well tax them on the number of unicorns they own. The GOP plan to eliminate the deduction has a different basis, however: first, it provides offsetting revenues for their huge regressive tax cut; and second, it is an attempt to impose a small government ethic on blue states.
Assume, for purposes of argument, that the tax cut passes with the SALT deduction either eliminated or highly limited. What happens next at the state and local level?
1. Who takes the fall? There can be little doubt that small government “conservatives” in blue states will be emboldened, and that politics in these states will become more polarized and toxic. Given that the tax cut can only pass with a razor-thin margin, will the voters respond by trying to remake their systems, or will they simply look to replace any GOP members of Congress in the hope of overturning the tax cut at the federal level? The latter would be much easier, and is more likely.
2. What gets cut? Assuming that the GOP plan works and that the blue states start turning red, there will have to be enormous cuts in state and local spending. Notwithstanding the fantasies of some GOP voters, this will not result in a significant reduction in the size of the welfare state, which is driven primarily by federal spending. Instead, based on what happened during the Great Recession, the cuts will come from: (a) infrastructure spending (particularly maintenance); (b) the education budget; (c) pensions; and (d) employee salaries and benefits. The first two will damage economic growth, and the third will have a major impact on a large cohort of GOP voters.