Tax Foundation: Bill to restore full SALT deduction would benefit high earners

Tax Foundation: Bill to restore full SALT deduction would benefit high earners
© Greg Nash

A bill from blue-state lawmakers to restore the full state and local tax (SALT) deduction and raise the top individual tax rate would cost $532 billion over a decade and primarily benefit those with high incomes, according to a report released Monday by the right-leaning Tax Foundation.

"Overall, this swap would reduce revenue collected by the federal government," Tax Foundation analysts wrote in their report.

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Sen. Bob MenendezRobert (Bob) MenendezMenendez calls for 'Marie Yovanovitch bill' to protect foreign service employees Senators condemn UN 'blacklisting' of US companies in Israeli settlements Media's selective outrage exposed in McSally-Raju kerfuffle MORE and Rep. Bill PascrellWilliam (Bill) James PascrellDemocrats, GOP spar over Treasury rules on Trump tax law On The Money: Economy adds 225K jobs in January, topping expectations | Appeals court tosses Dems' lawsuit over emoluments | Democrats decide against bringing back earmarks Democrat hits Mnuchin for giving Hunter Biden docs to Republicans MORE, both New Jersey Democrats, introduced legislation last month that would repeal the $10,000 limit on the SALT deduction created by Republicans' 2017 tax-cut law. The bill would also raise the top individual tax rate from 37 percent to its pre-tax law level of 39.6 percent.

The legislation is co-sponsored by many other lawmakers from high-tax states, including GOP Rep. Chris SmithChristopher (Chris) Henry SmithCheese, wine importers reeling from Trump trade fight House approves pro-union labor bill Pro-union bill draws 2020 battle lines MORE (N.J.) and three Democratic presidential candidates: Sens. Cory BookerCory Anthony BookerDemocratic senators ask DOJ watchdog to expand Giuliani probe CNN signs Andrew Yang as contributor Bloomberg qualifies for South Carolina primary debate MORE (D-N.J.), Kirsten GillibrandKirsten GillibrandClinton to honor Ginsburg at fashion designer's awards show Hillicon Valley: US hits Huawei with new charges | Judge orders Pentagon to halt 'war cloud' work amid Amazon challenge | IRS removes guidance on Fortnite game currency Gillibrand proposes creating new digital privacy agency MORE (D-N.Y.) and Kamala HarrisKamala Devi HarrisDemocratic senators ask DOJ watchdog to expand Giuliani probe CNN signs Andrew Yang as contributor How the media fall in and out of love with candidates MORE (D-Calif.).

Lawmakers from high-tax, Democratic-leaning states object to the SALT deduction cap because they argue that it unfairly punishes their states, which give more money to the federal government than they get back from it. The lawmakers have also said that some of their constituents are seeing smaller refunds and higher taxes due to the SALT deduction cap.

President TrumpDonald John TrumpFed saw risks to US economy fading before coronavirus spread quickened Pro-Trump super PAC hits Biden with new Spanish-language ad in Nevada Britain announces immigration policy barring unskilled migrants MORE has suggested that he's open to revisiting the SALT deduction cap, but key GOP lawmakers have said they won't reconsider it. Many Republicans argue that the SALT deduction subsidizes higher state taxes and that blue-state governors should lower their states' taxes. They also note that the majority of taxpayers in high-tax states are still getting a tax cut under the 2017 law, due to changes such as lower rates and a higher exemption level for the alternative minimum tax.

The Tax Foundation estimated that raising the top individual rate to 39.6 percent would not raise nearly enough revenue to cover the cost of repealing the SALT deduction cap. The group estimated that raising the top rate would raise about $111 billion over ten years, while eliminating the SALT deduction cap would lower revenues by about $643 billion.

The Tax Foundation also estimated that the bill from Menendez and Pascrell would almost exclusively benefit those at the top end of the income spectrum. That's because people can only take the SALT deduction if they itemize their deductions, and higher earners are the most likely to itemize. The group also said that raising the top individual rate to 39.6 percent would not offset all of the benefit that high earners would receive from eliminating the SALT deduction cap.

According to the Tax Foundation's estimate, taxpayers in the bottom two-fifths of income would get no tax cut under the bill, and taxpayers in the next two-fifths of income would see a "negligible" impact. Taxpayers in the top 1 percent of income would see the biggest benefit from the bill, receiving an increase in their after-tax income of 1.77 percent in 2019 and 2.79 percent in 2025.

"Eliminating the SALT cap and increasing the top rate to 39.6 percent would make the tax code less progressive," the Tax Foundation wrote.

Pascrell and Menendez's offices on Monday defended the lawmakers' bill, and noted that the Tax Foundation has been a supporter of the GOP tax law and has argued in favor of eliminating the SALT deduction. 

"While we wait for official scores from the non-partisan Joint Committee on Taxation before drawing any conclusions on cost, no distribution table can give the full story of the damage the SALT cap is inflicting homeowners and communities,” spokesmen for Pascrell and Menendez said in a statement.

Updated at 4:53 p.m.