Former President Trump’s Tax Cuts & Jobs Acts put a $10,000 cap on how much a federal taxpayer could deduct for state and local taxes paid. The cap was set at $10,000, which enraged the governors of high-tax states because it meant that folks with huge state and local tax bills were limited in how much they could deduct. The cap didn’t have much impact on most taxpayers, but really hit the highest income residents of their states.
Big state, big spending Democrats in Congress organized last week to repeal what is called the “SALT” (for State and Local Tax) cap. They told House Speaker Nancy Pelosi and the Biden White House that unless the misnamed Biden “infrastructure bill” repeals this cap, liberals will not vote for the bill.
Regardless of whether the legislation is wise, it is humorously ironic to see liberal Democrats such as Sen. Chuck Schumer demanding a tax break that will ultimately benefit the 1 percent. Every time a Republican proposes a tax cut of any kind, Mr. Schumer and his fellow congressional Democrats can be counted on to rise in unison denouncing it as just another break for the rich at the expense of the middle class. But this one is, well, different.
The open-ended deduction before the cap was passed incentivized high tax states to raise taxes even higher. Politicians could and did argue that since the higher taxes they were seeking could be deducted from one’s federal taxes, they weren’t nearly as bad as their opponents claimed. New York Gov. Andrew Cuomo is raising taxes even today, arguing that if his friends in Congress succeed in removing the cap, the benefits will offset what he is doing.
In reality, the deduction is little more than a federal subsidy that offsets the pain of paying local and state taxes and reduces federal revenues in the process. Without the cap, the bulk of the benefit goes to the richest taxpayers paying the highest taxes in high tax states who are subsidized by everyone else and to most a cap on it seems reasonable enough as it merely limits the size of the subsidy for taxpayers in high tax jurisdictions.
Politicians from states like California, Illinois, New York and other high-tax states attacked the cap when it was imposed as a purely political attack on “blue states” by a vindictive Republican president. Their case was weakened, however, because the cap affected only the truly wealthy. It is estimated that removing the cap now would reduce federal revenues by close to $90 billion and that most of that money go directly into the pockets of the wealthiest taxpayers in the highest taxed states.
The Congressional SALT Caucus announced last week that its members will lobby their colleagues to eliminate the cap, hold the infrastructure bill hostage if need be, and “educate” the public on how removing it will benefit not just the wealthiest taxpayers, but the beleaguered middle class. That will be a tough sell.
The Tax Policy Center analysis says that a mere 3% of middle-class taxpayers would benefit from removing the cap, and George Will in a recent column cited figures suggesting that the bottom 50% of taxpayers would benefit to the tune of perhaps $1 a year while taxpayers in the top 1 percent would get a tax cut valued at an average $23,500 per year.
If New York and the rest of these high tax jurisdictions were run by Republicans and a Republican administration was urging the removal of the cap, liberals in the House and Senate would be describing the proposal as an immoral attempt to further enrich the wealthy at the expense of everyone else.
Most progressives support the proposal since they see anything that forces even a modicum of spending restraint as out of the question. But New York’s leading progressive, Rep. Alexandria Ocasio-Cortez, striving to be true to her professed ideals, has deduced correctly that removing the cap is little more than “a gift to billionaires.”
The Biden administration is in something of a quandary. The president’s team is looking for way to offset the already outrageously expensive bill and jettisoning the cap would add $90 billion to the tab. On the other hand, like the ban on any state’s ability to cut taxes included in the last stimulus package, eliminating the cap would help reduce tax competition among the states that attracts people and business to lower tax jurisdictions.
It is hard to say how this will end. But at least the spectacle of Mr. Schumer and his ilk going to the mat to help the really wealthy at the expense of middle class and working Americans should provide us all with a laugh and give the folks at “Saturday Night Live” material for a skit or two.
• David A. Keene is an editor at large for The Washington Times.
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