The SALT Deduction Isn’t Big Enough. We Need A SALT Credit

West Virginia must be rich, right? All that federal money that flows there year after year. Hopefully readers see the obvious flaw, or contradiction.

Government spending is harmful, by its very description. Precisely because it signals the central planning of market goods, services and labor by politicians, it’s economically harmful. Only an economist could believe otherwise.

Which requires us to start with first principles of economics that have seemingly been forgotten in the present debate about state and local tax deductions (SALT). Government spending is harmful. Say it repeatedly because economists won’t.

Take Duke University economist Michael Munger. An individual with a free market bent in good standing with other free market types, Munger writes that “allowing citizens to deduct state and local taxes effectively rewards high-spending states and punishes prudence.” Munger’s assertion is accepted wisdom within, and that’s the problem. His views violate basic economic principles.

Really, “high-spending states” are rewarded through SALT deductions? How so? Munger’s commentary suggests that states in which local spending and taxation to fund that spending is sizable somehow gain from it. Just once it would be great if Munger or the Rose Bowl size crowd that believes as he does would explain how “high-spending states” are rewarded when their politicians tax and spend wastefully. Either there’s a latent Keynes inside Munger and most free market economists, or they’ve mistaken the meaning of SALT. Likely both.

To understand why, let’s say it again: government spending is harmful. California, New York, New Jersey, and Illinois are rich states despite all the local taxing and spending in those states, not because of it. They’d be quite a bit richer if state and local politicians weren’t damaging their economies with government spending.

It’s a long or short way of saying the SALT deduction doesn’t reward “high-spending states” as Munger and the Rose Bowl assume, rather it rewards the U.S. in total by reducing the flow of tax dollars to the federal government. If anything, and assuming Munger et al agree that government spending is harmful, they should clamor for a SALT credit to further limit the federal government’s tax share of economic activity in California, New York, and the other high-tax states. See West Virginia if you’re confused.

Is West Virginia rich or growing because of all the federal monies that have flowed its way for decades and years? Clown question. Central, politicized planning of resources is harmful, always and everywhere. Let’s call West Virginia and other poor U.S. states that receive gobs of federal money domestic lab-grown evidence of the truth that just as foreign aid fails always and everywhere around the world, it fails in the U.S. too.

Bringing it back to SALT, what Munger et al view as its demerit, that it “rewards high-spending states and punishes prudence,” is its greatest attribute. As much as possible we want to limit the harmful effects of government waste nationally by limiting the flow of tax dollars from U.S. states. Translated, if California wants to tax and spend imprudently, let it do just that. And let’s keep the wealth produced in California from reaching the federal government so that the national government won’t have as many dollars to damage the rest of the country with. SALT is simple. It’s about putting a fence around big government.

Which is why the true aim should be a SALT credit. Anything to localize spending and taxing as much as possible. There’s your states as laboratories. If there must be government waste, let it be in cities and states, not from the national government.