High Tax Salt States Also Subsidized By Medicaid

Important debates on the reconciliation bill have centered around the deduction for state and local taxes (SALT) and Medicaid waste and abuse. It turns out that the high tax states that benefit most from the SALT deduction also tend to be subsidized by harmful Medicaid policies. Many of these SALT states use the $9-to-$1 match for Medicaid expansion to discriminate against the vulnerable Medicaid recipients that qualify for an average $1.33-to-$1 match. The SALT states also disproportionately benefit from the Medicaid funding floor. Of the 14 states where 10% or more taxpayers took a SALT deduction in 2022, 13 draw on the $9-to-$1 Medicaid funding for able-bodied adults and nine are subsidized by the Medicaid funding floor.

State and Local Tax (SALT) Deduction

Under the 2017 Tax Cuts and Jobs Act (TCJA), taxpayers who itemize can deduct no more than $10,000 from their federal taxes for SALT. The SALT deduction provides a federal subsidy to states, which incentivizes higher taxes and bigger state and local governments. At the same time, the deduction forces federal tax rates to be higher across the board to raise the same amount of revenue. The SALT deduction disproportionately benefits high income individuals in high tax states.

Medicaid Expansion Discriminates Against the Most Vulnerable

The costs of care for beneficiaries are split between states and the federal government. The federal share of the spending is based on a formula called the Federal Medical Assistance Percentage (FMAP). The average FMAP for the traditional Medicare population (the disabled, pregnant women, children, and low-income seniors) is about 57%. Obamacare expanded Medicaid eligibility to able-bodied, working age adults. To encourage states to participate in Medicaid expansion, the FMAP for the expansion population was set at 90%. For every $1 of state Medicaid spending on the vulnerable, the federal government contributes about $1.33. Meanwhile, the federal government pays $9 for every $1 of state spending on work-capable adults.

Medicaid FMAP Floor

The federal share of Medicaid funding for the traditional Medicaid population is set by a formula based on the state's per-capita income. However, there is also a statutory minimum FMAP that sets a 50% floor of the federal share of Medicaid spending, even if the formula would produce a lower rate. Ten high-income states benefit from the FMAP floor. Washington, D.C. is also subsidized by an FMAP floor, in a unique way. While every other state's FMAP is determined by a formula, D.C.'s FMAP is statutorily set at 70%. If the normal formula was followed, D.C.'s FMAP would fall to the 50% floor. This special subsidy for D.C. costs American taxpayers about $1 billion per year. If the 50% FMAP floor was not in place and the programmatic formula was used, the federal share of D.C.'s Medicaid spending would fall to practically 0%.  

High Tax SALT States Also Subsidized by Medicaid
	% of Taxpayers Subsidized by SALT	State Income Tax Rate	Uses 90% FMAP for Able-Bodied Adults	Subsidized by FMAP Floor
District of Columbia	20%	10.75%	Yes	Yes
Maryland	20%	8.95%	Yes	Yes
California	15%	14.40%	Yes	Yes
Utah	14%	4.55%	Yes	No
Virginia	14%	5.75%	Yes	No
New Jersey	13%	11.75%	Yes	Yes
Colorado	12%	4.40%	Yes	Yes
Hawaii	12%	11.00%	Yes	No
Massachusetts	12%	9.00%	Yes	Yes
Oregon	12%	14.69%	Yes	No
Washington	12%	0.00%	Yes	Yes
Connecticut	11%	6.99%	Yes	Yes
Georgia	11%	5.39%	No	No
New York	10%	14.78%	Yes	Yes
Arizona	9%	2.50%	Yes	No
Delaware	9%	7.85%	Yes	No
Illinois	9%	4.95%	Yes	No
Minnesota	9%	9.85%	Yes	No
Florida	8%	0.00%	No	No
Idaho	8%	5.70%	Yes	No
Montana	8%	5.90%	Yes	No
Nevada	8%	0.00%	Yes	No
North Carolina	8%	4.25%	Yes	No
Rhode Island	8%	5.99%	Yes	No
South Carolina	8%	6.20%	No	No
Texas	8%	0.00%	No	No
Alabama	7%	4.15%	No	No
Kansas	7%	5.58%	No	No
New Hampshire	7%	0.00%	Yes	Yes
Oklahoma	7%	4.75%	Yes	No
Pennsylvania	7%	6.86%	Yes	No
Arkansas	6%	3.90%	Yes	No
Iowa	6%	3.80%	Yes	No
Louisiana	6%	3.00%	Yes	No
Maine	6%	7.15%	Yes	No
Michigan	6%	6.65%	Yes	No
Mississippi	6%	4.40%	No	No
Missouri	6%	5.70%	Yes	No
Nebraska	6%	5.20%	Yes	No
New Mexico	6%	5.90%	Yes	No
Tennessee	6%	0.00%	No	No
Vermont	6%	8.75%	Yes	No
Wisconsin	6%	7.65%	No	No
Alaska	5%	0.00%	Yes	No
Indiana	5%	5.02%	Yes	No
Kentucky	5%	6.20%	Yes	No
North Dakota	5%	2.50%	Yes	No
Ohio	5%	6.00%	Yes	No
South Dakota	5%	0.00%	Yes	No
West Virginia	5%	4.82%	Yes	No
Wyoming	5%	0.00%	No	Yes
Sources: SALT deductions in 2022, IRS. State income tax rates as of January 2025, Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. Medicaid expansion and floor as of 2025, KFF.