In Arizona, a Progressive Ballot Victory Exposes the Inequitable Federal Treatment of State and Local Taxes

Arizona teachers will get well-deserved raises under Proposition 208, the initiative that increases taxes on the 50,000 or so highest-income earners in our state and uses the resulting revenue to fund increased teacher pay.

But did you know that because of an inequitable change to the federal tax treatment of state and local tax payments – or SALT, for short – Proposition 208 also benefits Texans? It does. Here’s why:

Before Donald Trump’s presidency, state-level income tax increases used to fund higher teacher pay would barely impact federal revenue. The higher teacher pay would face both federal income and employment tax, thus increasing federal tax collections. But those who paid additional state tax could deduct the payments on their federal tax returns, which would decrease federal tax revenue.

In other words, the net effect of something like Proposition 208, pre-Trump, would have been more or less a wash federally speaking. But Trump’s 2017 tax act fundamentally altered that state-federal tax equilibrium.

Continue reading at AZcentral.com. This piece originally appeared in the Arizona Republic under the headline, “Proposition 208 is good for Arizona schools. It also exposes flaws within our tax system.”

Bob Lord, an Institute for Policy Studies associate fellow, practices tax law in Phoenix.