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) MenendezEnding the Cyprus arms embargo will increase tensions in the Eastern Mediterranean We can accelerate a cure for Alzheimer's The Hill's 12:30 Report: Manafort sentenced to total of 7.5 years in prison MORE and Rep. Bill PascrellWilliam (Bill) James PascrellOn The Money: Judge rules banks can give Trump records to House | Mnuchin pegs debt ceiling deadline as 'late summer' | Democrats see momentum in Trump tax return fight | House rebukes Trump changes to consumer agency Pelosi employs committee chairs to tamp down calls for Trump impeachment Democrats sense new momentum in Trump tax return fight 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 SmithThirty-four GOP members buck Trump on disaster bill House votes to overturn Trump ObamaCare move Main Street businesses need permanent tax relief to grow MORE (N.J.) and three Democratic presidential candidates: Sens. Cory BookerCory Anthony Booker2020 Democrats target federal ban on abortion funding Gillibrand seizes on abortion debate to jump-start campaign 2020 hopeful John Delaney unveils T climate plan MORE (D-N.J.), Kirsten GillibrandKirsten Elizabeth GillibrandTrump defense pick expected to face tense confirmation 2020 Democrats target federal ban on abortion funding Gillibrand seizes on abortion debate to jump-start campaign MORE (D-N.Y.) and Kamala HarrisKamala Devi HarrisSan Francisco police chief apologizes for raid on journalist's home Gillibrand seizes on abortion debate to jump-start campaign Senate Democrats to House: Tamp down the impeachment talk 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 TrumpPapadopoulos on AG's new powers: 'Trump is now on the offense' Pelosi uses Trump to her advantage Mike Pence delivers West Point commencement address 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.