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February 17, 2020 The Tax Lawyer

Red States, Blue States: Lessons from the State Death Tax Credit and the “SALT” Deduction

Vol. 73, No. 2 - Winter 2020

Jeffrey A. Cooper


Since 1861, every version of the federal income tax has included a deduction for state and local taxes (often referred to, using a popular tax acronym, as the “SALT deduction”). Since the SALT deduction minimizes the effect of state and local taxes on taxpayers, it offers greater benefits to those living in states that impose the highest tax burden: the high-tax “blue” states. In 2017, the Tax Cuts and Jobs Act marked a major shift in this long-established federal policy toward state taxes. Among its many provisions, the Act capped the SALT deduction at $10,000 per married couple, providing no federal tax offset for amounts paid in excess of that amount.

Leaders of blue states balked at the change. They accused federal officials of targeting their states for political reasons. They sued the federal government to try to reverse the legislation. They decried that the 2017 law violated key principles of federalism and that it would prompt an economic civil war between the Democratic blue states and the Republican red states.

This Article attempts to address two questions raised by this turn of events. First, how will states respond to this change in federal law? Second, does the capping of the SALT deduction represent a major shift in federal-state relations, an unprecedented attack on blue states, or is it simply politics as usual?

This Article’s novel approach to the subject is to consider these questions by exploring the similarities and contrasts between the federal income tax SALT deduction and the federal estate tax state death tax credit, which was established in 1924 and repealed in 2001. Viewing the 2017 legislation within this broader historical context reveals trends and patterns, providing greater insight than would a study of the SALT deduction in isolation.

This approach yields two results. First, analyzing state legislative responses to the 2001 estate tax changes helps to predict how state governments may respond to the 2017 income tax changes and thus offers insight into the future evolution of state income tax regimes. Second, placing the 2017 Tax Act in a broader historical context reveals a pattern of federal interference with state tax regimes, yielding lessons about the interdependence of federal and state tax law as well as how a changing political climate can shape tax policy.

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