Is C-SALT Harmful to Economic Health?

• In Event: Corporate Potpourri: Compliance, Incentives, and Insights

Abstract

This paper analyzes the consequences of the U.S. federal tax deduction for state and local tax payments by companies (C-SALT). State business tax rates vary with economic conditions, and are also heavily influenced by federal tax deductibility – so much so that removal of deductibility would actually reduce combined federal and state business tax burdens. C-SALT deductions nonetheless produce efficient incentives both for taxpayers and for state governments; in the absence of C-SALT deductions, levels of business activity would be inefficiently distributed between states. Nineteen states reduced their corporate tax rates in the aftermath of the 2017 federal corporate tax reduction, a reaction pattern consistent with efficient C-SALT deductibility.

Author

• James R. Hines, University of Michigan