Trump's tax returns offer a lesson about the state and local tax deduction
Capping the SALT deduction for individuals but not for businesses creates issues
It’s been a little over a week since the New York Times published an exposé on President Trump’s tax returns — though, given the pace of the news cycle, it feels like ages ago. Since then, there’s been a whole lot written about what the President’s tax returns can tell us about his personal finances and about the operation of the U.S. tax system. In today’s newsletter, I’d like to add my two cents to the conversation, focusing on one detail in the Times story: the deductions that President Trump claimed on his federal tax return for state and local taxes he paid.
The Times reports:
The tax records reveal another way Seven Springs has generated substantial tax savings. In 2014, Mr. Trump classified the estate as an investment property, as distinct from a personal residence. Since then, he has written off $2.2 million in property taxes as a business expense — even as his 2017 tax law allowed individuals to write off only $10,000 in property taxes a year.
Courts have held that to treat residences as businesses for tax purposes, owners must show that they have “an actual and honest objective of making a profit,” typically by making substantial efforts to rent the property and eventually generating income.
Whether or not Seven Springs fits those criteria, the Trumps have described the property somewhat differently. In 2014, Eric Trump told Forbes that “this is really our compound.” Growing up, he and his brother Donald Jr. spent many summers there, riding all-terrain vehicles and fishing on a nearby lake. At one point, the brothers took up residence in a carriage house on the property. “It was home base for us for a long, long time,” Eric told Forbes. And the Trump Organization website still describes Seven Springs as a “retreat for the Trump family.”
The question of whether Seven Springs is an “investment property” or a “personal residence” is an interesting one. But I’m more interested in what this part of President Trump’s tax returns can teach us about an important federal tax provision: the state and local tax deduction.
The Times report focuses on an aspect of the state and local tax deduction that is still not fully appreciated in D.C. policy circles. Everyone knows that, since 2017, taxpayers have only been allowed to deduct up to $10,000 in personal state and local taxes for federal purposes. By contrast, there is essentially no limit on the deductibility of business taxes paid to state and local governments.
The distinction between “personal” and “business” taxes paid to state and local governments is not entirely new. Since the 1960s, households have only been allowed to deduct specific categories of personal taxes — but have remained able to deduct all categories of taxes paid in “carrying on a trade or business” or taxes that represent costs of earning income. Additionally, for decades, the individual Alternative Minimum Tax has denied a deduction for personal state and local taxes, while still allowing a deduction for business state and local taxes .
But now, the question of whether a tax paid to a state or local government counts as “personal” or relates to a “business” matters more than ever before . It can be a difference between a deduction of $10,000 and a deduction of $2.2 million.
What does this mean, practically speaking? For one thing, it means that the continual battle between taxpayers and the IRS over the business vs. personal line now has even higher stakes. Before 2017, if you owned a property in upstate New York that you claimed was an investment but the Service argued was a residence, you’d be fighting over whether you could take deductions for things like maintenance costs, repairs, depreciation, and mortgage interest. Now, property taxes would be added to that list.
Moreover, the disparate treatment of “personal” taxes and “business” taxes has big implications for how state and local governments raise revenue. Generally speaking, states and localities want the taxes they collect to be fully deductible for federal tax purposes. When the 2017 tax law capped the deductibility of personal taxes but not business taxes, state and local governments noticed. Some, like Connecticut, rushed to shift their tax burden from households to business entities. Other jurisdictions may make more gradual changes to how they raise revenue.
In sum, the distinction between “personal” taxes and “business” taxes has become an important feature of the U.S. federal tax landscape. It has big implications for how much households owe in taxes, how state and local governments design their tax systems, and which disputes the IRS has to fight. This is an aspect of the state and local tax deduction that the D.C. policy world should start paying more attention to.
 Incidentally, this might help clear up the slightly confusing timeline of events presented by the Times. We’re told that, since 2014, President Trump has classified Seven Springs as an investment property, rather than as a personal residence. The Times then states that this distinction matters because of the 2017 tax law, which capped the deductibility of “personal” state and local taxes but not “business” state and local taxes. Some readers might have wondered how President Trump had the foresight in 2014 to take advantage of a tax provision that would not be enacted until 2017. The answer: We know that President Trump was subject to the Alternative Minimum Tax for several tax years, so the distinction between “personal” and “business” state and local taxes would have mattered for him even before the 2017 tax law was passed.
 Strictly speaking, the term “business” isn’t entirely precise, because the category of taxes that are not subject to the $10,000 cap also includes certain taxes paid on investment activities that don’t rise to the level of a trade or business.