Question

How does the federal tax exception of state and local taxes (SALT) allow state and local governments to raise taxes without overburdening their constitutions as much as they would otherwise?

Answer 1

The State and Local Tax exception or SALT deduction has been an integral part of the taxation system of the United States of America.lt reflects a collaborative relationships between the federal,state and local governments that existed for over hundreds years.

SALT deduction provides the state and local governments with an indirect federal subsidy by decreasing the net cost of nonfederal taxes for those who pay them.

SALT exception or deduction works in the following manner.

*lt allows tax payers who itemize deductions on their federal income tax returns to deduct state and local real estate and property taxes, as well as income taxes or sales taxes.

* Tax payers are protected from being taxed twise on the same income received by them.

* Deduction on mortgage taxes along with Dedication on mortgage interest provides a strong incentive for home ownership and deducation on sales tax will have a positive impact on production.

* As a result, tax evasion is less and taxes are more convenient to pay.

* So even if the state governments and local governments Increase taxrate, taxpayers won't feel over burdened.

From the point of economic growth, all these exceptions and deducations significant since they increase disposible income which inturn stimulates the consumption expenditure which is an important component of aggregate demand ,one of the key factors which drive economic growth.The cap introduced by President Trump on SALT deducations will do more harm than good to American economy.

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