Lawmakers can't reconcile weakening the SALT cap with progressive goals

Lawmakers can't reconcile weakening the SALT cap with progressive goals
© Greg Nash

While President BidenJoe BidenTrump endorses challenger in Michigan AG race On The Money: Democrats get to the hard part Health Care — GOP attorneys general warn of legal battle over Biden's vaccine mandate MORE has called for higher taxes on wealthy Americans and corporations to finance a $3.5 trillion budget agreement, some Democrats in Congress are undermining this agenda by demanding that the agreement cut taxes on their affluent constituents. These lawmakers argue that the $10,000 cap on the state and local tax (SALT) deduction created by the GOP’s 2017 tax law undermines their states’ ability to raise revenue through progressive tax policy.

But in reality, any effort to weaken or repeal the cap would simply be a pointless giveaway to the rich. Democrats should reject this regressive tax cut that would draw critical resources away from needed public investments.

“No SALT, no deal,” said Reps. Josh GottheimerJoshua (Josh) GottheimerCongress braces for spending fights amid threat of government shutdown Business groups aim to divide Democrats on .5T spending bill Sirota slams 'fake argument' for splitting infrastructure package, reconciliation bill MORE (D-N.J.), Bill PascrellWilliam (Bill) James PascrellDemocrats brace for toughest stretch yet with Biden agenda LIVE COVERAGE: Tax hikes take center stage in Ways and Means markup Democrats draw red lines in spending fight MORE (D-N.J.) and Tom Suozzi (D-N.Y.), who are just some of the lawmakers demanding that Congress repeal or weaken the SALT cap in their reconciliation bill, the legislative vehicle that will let Democrats pass their budget agreement without any Republican votes. These lawmakers claim that the cap deliberately makes it harder for their heavily Democratic state governments to tax the wealthy at high rates without pushing those taxpayers out to lower tax jurisdictions.  

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Before 2018, taxpayers who itemized deductions on their federal income taxes could deduct every dollar they paid in property taxes, plus either income or sales taxes at the state and local level, from their taxable income. The Republican tax law capped that amount at $10,000 per household through 2025. Opponents of the cap want to repeal it entirely but have also proposed raising it or repealing it only for households with incomes below a threshold. 

It appears they are winning. Senate Budget Committee Chairman Bernie SandersBernie SandersBriahna Joy Gray: Push toward major social spending amid pandemic was 'short-lived' Sanders 'disappointed' in House panel's vote on drug prices Manchin keeps Washington guessing on what he wants MORE (I-Vt.) previously said that repealing the SALT cap “sends a terrible, terrible message when you have Republicans telling us that this is a tax break for the rich.” But he set aside $120 billion in a recent draft reconciliation blueprint for unspecified changes to the SALT deduction, an amount greater than what the Bipartisan Infrastructure Framework earmarks for roads and bridges.

Fortunately, other Democrats across the ideological spectrum have opposed weakening the SALT cap because doing so would give away much needed tax revenues to the wealthy. This group includes both moderates such as Sen. Michael Bennet (D-Colo.) and Reps. Stephanie Murphy (D-Fla.) and Abigail SpanbergerAbigail Davis SpanbergerOvernight Defense & National Security — Milley becomes lightning rod Meeks on being mistaken for a staffer: 'Glad I still blend in with the cool kids' How lawmakers aided the Afghan evacuation MORE (D-Va.), as well as some in the party’s leftwing, including Reps. Alexandria Ocasio-CortezAlexandria Ocasio-CortezConservative group files ethics complaint over Ocasio-Cortez appearance at Met Gala If .5 trillion 'infrastructure' bill fails, it's bye-bye for an increasingly unpopular Biden The Hill's Morning Report - Presented by National Industries for the Blind - Schumer: Dem unity will happen eventually; Newsom prevails MORE (D-N.Y.), Joaquin CastroJoaquin CastroHarris's delayed trip to Vietnam ratchets up Havana Syndrome fears Lawmakers flooded with calls for help on Afghanistan exit Lawmakers can't reconcile weakening the SALT cap with progressive goals MORE (D-Texas) and Mark PocanMark William PocanBiden seeks to build Democratic support among unions Overnight Energy & Environment — Presented by the American Petroleum Institute — A warning shot on Biden's .5T plan Overnight Defense & National Security — America's longest war ends MORE (D-Wis.).

These skeptical Democrats are right. Even if lawmakers repealed the SALT cap exclusively for households earning below $500,000, less than 3 percent of the benefit would go to the lowest earning 60 percent of Americans. Only households that earn enough money to pay over $10,000 in state and local taxes would benefit from weakening the cap. Wealthy households also are the most likely to itemize their deductions, which just 9 percent of tax-filing households earning below $200,000 did in 2018. And like all deductions, SALT works by reducing taxable income, which lowers the tax burden of someone in a high tax bracket more than someone in a low bracket.

Contrary to what the cap’s opponents say, it does not keep state and local governments from raising revenue. Those governments already received $525 billion from the American Rescue Plan, which far exceeded their current budget shortfalls. But even if they did need more revenue, the SALT cap is not preventing them from raising taxes on the wealthy. 

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High-tax states, including New York, New Jersey, Connecticut and Washington, have raised or sustained taxes on their richest residents since the cap was implemented. This suggests that effective federal tax rates are not too high for states to raise revenue. And there’s no sign that the cap is driving wealthier taxpayers away: In 2018, 32 percent of the net growth in U.S. households earning more than $1 million took place in the five states that tax them the highest, compared to 27 percent in 2017.

Rather than diverting funds from other progressive priorities to finance this tax giveaway to the rich, federal lawmakers should do three things. First, they should address a legitimate criticism of the SALT cap by mitigating the marriage penalty it creates. Under present rules, married couples face the same cap as single taxpayers, which means they can claim only half as large of a deduction per person. Raising the cap for married couples and making the change deficit neutral by lowering the singles cap would give people in high-tax states some tax relief without sacrificing federal revenue. Next, lawmakers should make the improved SALT cap permanent. Finally, they should cap the value of all itemized deductions a taxpayer can claim (as former President Obama proposed) to prevent wealthy people from eliminating their income tax liability by claiming other tax breaks like the SALT deduction.

Federal lawmakers could also support state and local governments directly by creating a fund that would automatically help them cover revenue losses during downturns, as experts at the Tax Policy Center have proposed. Keeping the SALT cap and using its revenues to give state and local governments direct aid would prevent regressive budget cuts during downturns instead of cutting taxes for the rich.

The reconciliation package gives Democrats a rare and valuable opportunity to invest in education, infrastructure, scientific research and a stronger social safety net — all things that make American society fairer and more dynamic. They shouldn’t let a regressive tax break divert hundreds of billions of dollars from these crucial public investments.

Brendan McDermott is a fiscal policy analyst at the Progressive Policy Institute's Center for Funding America's Future.