Taxes on business are properly applied after subtracting production costs: wages and salaries, the costs of materials and energy, the costs of acquiring and maintaining buildings, and so on. After all, such costs are not part of business income — except to the extent that the payments for them are income for the underlying workers and suppliers, who pay the requisite taxes. Taxing the business income of any company without excluding such costs would be blatant double taxation.
But what about the “B-SALT” taxes, those paid by businesses to state and local governments? Analytically, such taxes are payments for the services delivered by states and localities. Whether those are worth the taxes paid — such taxes are not voluntary in the sense that most purchases in the private sector are — is an interesting question, but not relevant to the fundamental principle that B-SALT payments to governments are a cost of doing business.
Accordingly, such taxes should be excluded from the definition of “income” subject to other taxation. The B-SALT deduction is thus necessary and appropriate in a tax system for which the base is income minus costs.
But there is some Republican support in Congress for eliminating or limiting the B-SALT deduction in order to help “pay for” an extension of the 2017 tax cuts, as well as other tax cuts proposed by the second Trump administration and various members of Congress.
The revenue purported to be “saved” by limiting or eliminating the B-SALT deduction is not trivial: about $223 billion over 10 years if deductions are ended for state and local corporate income taxes, and about $209 billion if deductions are ended for property taxes.
Only in the Alice-in-Wonderland world of congressional budgeting can an obvious tax increase imposed upon businesses be viewed as a “savings.” The more relevant issue is the effect of policy shifts on the economy writ large and on specific sectors relative to others. A recent analysis from the Tax Foundation finds that elimination of the B-SALT deduction for both income and property taxes would reduce long-run GDP by 0.6 percent.
The Tax Foundation report is unclear about how that GDP impact is calculated, but the central principle is sound: Eliminating or limiting the B-SALT deduction would represent a substantial increase in business taxation. The result would be less capital investment, reduced labor productivity, a decline in wages and lower overall GDP growth.
The energy sector is particularly susceptible to the adverse effects of a B-SALT deductibility limitation or elimination, because in addition to income and property taxes, fossil fuel producers must pay substantial severance taxes to several states. In 2024, those payments totaled about $17.6 billion. Such severance payments demonstrate that fossil energy resources are a form of national wealth, the value of which is divided in among investors, workers, land owners and suppliers in proportions driven by competitive market prices. Governments receive a share, determined largely by state tax policies.
For 2024, the Energy Information Administration reports “first purchase prices” for crude oil at about $75 per barrel, and total production of about 4.8 billion barrels, yielding a gross output value of about $360 billion. For natural gas, it reports average wholesale prices of about $2 per 1,000 cubic feet, and production of about 37.8 trillion cubic feet, or a gross output value of about $76 billion in 2024. The total is about $436 billion.
States and localities collect on average about 10 percent of the revenues from oil and gas sales. The federal corporate income tax rate is 21 percent. If we assume an effective tax rate of 15 percent after various deductions and credits, an elimination of the B-SALT deduction would increase the taxable incomes of fossil fuel producers by that 10 percent, and tax liabilities — a decrease in net income — by 1.5 percent.
The production of oil and gas is capital intensive, so the ensuing effect on production would not be significant in the short run, because the capital assets would remain in place (although drilling rigs, for example, can be shut down). But in the long run, investment and production would be affected.
Under reasonable assumptions about long-run supply conditions, a decline in net income of 1.5 percent would result in an annual production decrease of about 4 to 5 percent. That is not trivial. It would represent a decline of about $20 billion in national wealth that otherwise would be economically efficient to produce.
The B-SALT deduction is not like the individual deduction for state and local taxes (SALT) allowed for people tabulating their federal income tax liabilities. Individuals are not businesses, and just as they are not allowed to deduct the ordinary costs of living (e.g., grocery bills), there is no justification for allowing a SALT deduction. That the U.S. tax code allows such a deduction, whether limited or not, is driven by special-interest demands in Congress for a SALT deduction as a means of shifting the costs of state and local government in high-tax states onto taxpayers in low-tax states.
But that is distinct from the B-SALT deduction. State and local taxes paid by businesses are a cost of doing business. Congress should keep that central reality in mind.
Benjamin Zycher is a senior fellow at the American Enterprise Institute.
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