Blue states angry over SALT cap should give fiscal sobriety a try

With the energy of pigs rooting out truffles, Democrats are searching high and low for new taxes to shrink income inequality and to fund their budget-busting social programs like "Medicare for all" and free college tuition.

One group, however, is not playing ball. Those are the Democrat legislators from high-tax blue states, who want to give taxpayers a break by increasing or eliminating the $10,000 cap on the state and local tax (SALT) deduction.

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Rep. Lauren UnderwoodLauren UnderwoodCongressional scorekeeper: Repealing SALT deduction cap would benefit high earners Republicans raise concerns over House campaign arm leadership House panel to hold hearings on SALT deduction cap MORE (D-Ill.) and Rep. Sean CastenSean CastenCongressional scorekeeper: Repealing SALT deduction cap would benefit high earners House panel to hold hearings on SALT deduction cap The Hill's Morning Report - Trump struggles to replicate 2016 coalition MORE (D-Ill.) recently introduced a bill in the House that would raise the cap on the SALT deduction to $30,000 for a married couple and $15,000 for a single filer. Their bill provides for those limits to be indexed to inflation, allowing the cap to rise over time.

Their measure is described as a “surgical” fix, aimed at helping middle-income families who, with the higher cap, would be able to deduct their entire SALT burden.

It represents a compromise; earlier in the year some 40 legislators, mostly Democrats, unveiled a bill dubbed the Stop Attacking Local Taxpayers Act, that would rescind the cap altogether.  

That more generous approach was dead on arrival, in part because the bill would have re-imposed a top individual rate of 39.6 percent, up from 37 percent, to pay for it.

Though the Underwood bill might garner more support, its path is also uncertain, especially in the Senate. Not only do Republicans not want to re-open their signature tax bill, which might encourage other changes, but Democrats in low-tax states are resistant as well.

They are concerned that removing the SALT cap would be viewed as a hand-out to the wealthy at a time when their party is intent on using tax policies to narrow the gap between rich and poor.

President Trump commented earlier this year that he would be “open” to revising the SALT cap, saying that New Yorkers had been complaining to him about the loss of deductibility.

Sen. Chuck GrassleyCharles (Chuck) Ernest GrassleyGrassley raises concerns about objectivity of report critical of GOP tax law's effects Overnight Health Care: Key Trump drug pricing proposal takes step forward | Missouri Planned Parenthood clinic loses bid for license | 2020 Democrats to take part in Saturday forum on abortion rights Key Trump proposal to lower drug prices takes step forward MORE (R-Iowa), head of the Finance Committee, squashed that prospect immediately. In a tweet, Grassley stated: “The SALT deduction is a federal subsidy for states to raise taxes on their residents without political consequence.” 

Grassley may be right, but it appears that limiting the SALT deduction had real political consequences for the GOP; that’s one explanation for Republicans losing 14 House seats in the 2018 midterm elections in those blue states most impacted by the SALT cap.

In particular, Rep. Erik PaulsenErik Philip PaulsenFight over Trump's new NAFTA hits key stretch Blue states angry over SALT cap should give fiscal sobriety a try Push for ‘Medicare for all’ worries centrist Dems MORE (R-Minn.) and Rep. Peter Roskam Peter James RoskamBlue states angry over SALT cap should give fiscal sobriety a try Illinois Dems offer bill to raise SALT deduction cap Illinois New Members 2019 MORE (R-Ill.) both lost to opponents who lambasted their role in designing the GOP tax bill. 

President TrumpDonald John TrumpNew EPA rule would expand Trump officials' powers to reject FOIA requests Democratic senator introduces bill to ban gun silencers Democrats: Ex-Commerce aide said Ross asked him to examine adding census citizenship question MORE is not the only one getting an earful from those penalized by the SALT change. Representatives of states like New York, New Jersey and California have been blistered by constituents who can no longer fully deduct their state and local income and property taxes.

It’s not surprising; the Treasury Department published an estimate in early March that about 10.9 million filers were subject to the cap, which cost them $323 billion in extra taxes. 

Like everything these days, this is a highly partisan affair. Officials in blue states say the cap, which is expected to provide some $673 billion in revenues over a decade, targeted states that did not vote for President Trump.

Another way of looking at it is that states run by Democrats typically impose higher taxes and were disproportionately impacted by the change in SALT treatment. People in  states like New York, New Jersey and Connecticut were not attracted by Trump’s promise of lower taxes and lighter regulations and so did not vote for him.  

As President Obama so famously said, "Elections have consequences."

When they passed the Tax Cuts and Jobs Act of 2017 and the cap on SALT deductions, Republicans suggested the change might spur blue-state officials to cut spending. They predicted that residents of states like New York would surely now demand budget restraint. That was wishful thinking.

New York, whose Democratic governor, Andrew Cuomo, has whined that the SALT change has caused a budget shortfall in his state, recently passed a bloated budget of $175.5 million, up from $168.3 million last year.

Funding items like higher Medicaid spending, $27 million in tuition for undocumented students and $100 million for publicly-financed political campaigns will require any number of new taxes, including:

  • a mansion tax,
  • a tax on plastic bags,
  • a congestion pricing fee for Manhattan,
  • a 20-percent sales tax on vaping products,
  • a tax on upstate car rentals,
  • a new manufacturers’ tax on opioids and
  • an internet sales tax.

So much for restraint.

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Cuomo has blamed the SALT limit for pushing residents to flee to Florida and other low-tax states. No, governor, it is high taxes that sent so many high-income New Yorkers packing last year, and more will surely follow unless the state reins in its tax-and-spend habits.

New York is not alone. It lost the most residents of any state last year, but Illinois and Connecticut were close behind. These states will be raising taxes on an ever-smaller population, which will only exacerbate their problems. Fiscal sobriety is the only way forward.

Just like reversing the SALT deduction, no one expects that to happen any time soon.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. For 15 years, she has been a columnist for The Fiscal Times, Fox News, the New York Sun and numerous other organizations. Follow her on Twitter: @lizpeek.