‘Donors' vs ‘takers': SALT battle stirs debate between blue and red states

Yahoo

5 days ago

President Trump's domestic agenda bill is spurring a debate over whether blue states are subsidizing red states.
After a successful pressure campaign from blue-state Republicans, the House version of Trump's bill was amended to boost the state and local tax (SALT) deduction cap to $40,000.
The agreement was a major win for a handful of House Republicans from wealthier districts in blue states. The GOP lawmakers backing the larger cap argued their constituents tend to pay higher state and local taxes in large part due to high property values.
Before Trump's 2017 tax bill, the constituents could write off their state and local taxes. That bill imposed a $10,000 ceiling, which the blue-state GOP lawmakers said unduly punished their area's homeowners, who suddenly had a massively larger tax bill.
The SALT cap is controversial because it's a tax break that benefits wealthier Americans in more affluent coastal states.
But those arguing that the higher ceiling is justified say their constituents already send in more to the federal government in taxes than they get out in public services. As a result, they argue their states are already effectively subsidizing state with lower property values that tend to get more in federal benefits than their constituents pay in taxes.
This has spurred a larger debate over who is subsidizing who when it comes to red and blue states.
Democrats and blue-state Republicans defend the SALT deduction and advocate for a higher cap because their states often pay more in taxes than they get back in services.
They distinguish between 'donor states' and 'taker states' and argue that, as donors, they should be able to fully exempt their regional taxes from their federal tax bill.
'Most of these states … are high tax states that give more to the federal government than they get back in federal services. Most of the red states are taker states, states that get more from the federal government than they actually pay in taxes,' Rep. Tom Suozzi (D-N.Y.) said during a markup of the tax portion of the GOP bill earlier this month.
'It's really not fair that we are being stuck with this cap on our state and local tax deduction because people are getting taxed on taxes that they've already paid,' he said.
The argument is a common one among Democrats. California Gov. Gavin Newsom (D) made the point during an interview with television pundit Sean Hannity in 2023.
'We're subsidizing your states, Sean, because of your policies,' he said.
Republicans in red states see things dramatically differently.
They argue many residents of blue states are simply living in high-tax areas and shouldn't get a federal tax reduction for doing so. If they want lower taxes, vote to lower the local taxes or move.
State tax experts say blue states are generally sending in more to the federal government than they are getting out in benefits because they have larger local economies and more higher-income taxpayers.
The 'donor state' and 'taker state' distinction has been around for decades, though funding used to flow more from northern states to Southern states rather than from coastal states to interior states.
Recent studies show a bit of a complicated picture, though in many cases it is blue states that are paying in more to the federal government than they are taking out.
For example, Washington, Massachusetts and New Jersey all ran a deficit with the federal government in 2023, according to a 2025 New York comptroller study, meaning these states sent in more in taxes than they received in benefits. Other states with a substandard balance of payments include California, New Hampshire, Minnesota, Utah and Illinois.
Most of those states have repeatedly voted for Democratic candidates in recent presidential elections and have Democratic senators representing them in Congress. Utah is a notable exception.
However, when it comes to states simply taking large amounts of benefits from the federal government, the report from the New York comptroller paints a more complicated picture.
The top 10 taker states in 2023, the report found, included New Mexico, Virginia, Hawaii, Maryland and Maine, which repeatedly have backed Democrats in the presidential election. The list also included Alaska, Mississippi, West Virginia, Kentucky and Alabama, five red states.
New Mexico, Virginia, Alaska, Mississippi and West Virginia all receive more than $12,000 more per person from the federal government than they pay in taxes, according to the comptroller study.
A separate report from the State University of New York found the states in 2022 with the most favorable balance of payments per capita were Virginia ($14,888), Kentucky ($14,507), Alaska ($14,031), New Mexico ($13,009), and Maryland ($11,617).
Texas and Florida, the two GOP-leaning states with the largest economies, received moderately more per person from the federal government than they provided in taxes.
There's no single government program or tax that's responsible for the net transfers from blue states to red states, but experts point to health care matching contributions, also known as FMAP, as a major driver.
'If you look at FMAP, the share usually for red states is much higher, meaning there is more federal support,' Lucy Dadayan, a principal research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, told The Hill. 'Medicaid is the largest share of all the federal aid going to the states. That's one [way] that red states get substantially more funding from the federal government than the blue states get.'
The GOP bill makes large cuts to public health care programs to partly offset some of its tax cuts, with millions of people set to lose access to public health care as a result of the legislation.
There is no regional breakdown of where those people live from the Congressional Budget Office, but the distribution of FMAP allocations suggests they may be located in Republican-led states.
While the bill still has to make it through the Senate, the higher $40,000 SALT cap would lower taxes on more affluent taxpayers by allowing them to deduct more local taxes from their federal returns.
This could take a bite out of the net federal subsidies from Democratic to Republican states by amping a tax cut that is of particular advantage to Democratic states.
It will also contribute substantially to the federal deficit. One estimate from the Tax Policy Center found that a $40,000 SALT cap without an income threshold would cost more than $600 billion through 2034.
Getting rid of the SALT cap altogether would cost more than $1.2 trillion through the next nine years, the group found.
All the maneuvering the House has done on SALT and the last-minute agreement Republicans struck to raise the cap to $40,000 could be for nothing.
Republicans in the Senate don't have a SALT caucus that is threatening to break from the rest of their party in the same way that the House does.
Senate Majority Leader John Thune (R-S.D.) told The Hill that the SALT cap wasn't really an issue for the Senate, even though he recognized that the House had to make a deal.
Investors say they expect changes on the bill could come from Senate moderates.
'We will be watching Senate moderates and moves in the bond market, as these will likely drive last-minute adjustments. The true deadlines remain the August recess,' Larry Adam, chief investment officer of investment bank Raymond James, wrote in a note to investors.
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