The Biden administration is exploring tax cuts that mostly benefit wealthier Americans as congressional Democrats home in on restoring the breaks for their relatively well-heeled constituents.
The administration’s talk of bolstering a federal income tax write-off for state and local taxes, or SALT in tax-speak, comes as President Biden vows to impose higher taxes on the wealthy to pay for his infrastructure and climate change plans.
Treasury Secretary Janet Yellen said she is interested in working with Congress on cutting “inequities” resulting from the $10,000 cap on SALT deductions, which has been a priority for Democrats since the cap was established as part of the 2017 tax law.
“There are a lot of options that have been presented and I would work with you to try to ensure that the inequities that this caused are remedied in a fair and responsible way,” Ms. Yellen told Rep. Josh Gottheimer, New Jersey Democrat, at a hearing this week.
Ms. Yellen said Mr. Biden has talked about capping itemized deductions at 28% of their value and suggested there could be room for compromise on the exact formula.
Mr. Gottheimer and lawmakers from high-tax states such as New York and California have been gunning for a repeal of the cap since the 2017 law passed.
“I think we need to study just what impact it’s had and look forward to working with you to find a fair way to address it,” Ms. Yellen said.
Repealing the cap has bipartisan support, though Democrats have the votes to muscle changes through without Republicans if need be.
They leveraged a fast-track budget tool to pass Mr. Biden’s $1.9 trillion relief package without GOP support and are weighing whether to use it again this year to make changes to the tax code.
The cap is a top issue for Senate Majority Leader Charles E. Schumer of New York, who will dictate what is in the Senate versions of Mr. Biden’s forthcoming tax and spending plans.
Mr. Schumer made the restoration of the tax break a part of the debate over COVID-19 relief this year.
“We need to bring our federal dollars back home to cushion the blow from this virus — and this harmful SALT cap — has dealt so many homeowners and families locally,” he said.
The problem for Democrats is that the tax break is heavily skewed toward upper-income earners at a time when Mr. Biden and his left flank are pushing to increase taxes on the wealthy.
“The Democrats have never given up on that,” Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, said in an interview. “They perceive that it was most heavily felt in some of the states that are very strongly supportive of their party in elections.”
Both before and after the cap took effect, roughly 90% of the benefits were projected to flow to taxpayers with an annual adjusted gross income of more than $100,000, according to projections from the Joint Committee on Taxation, Congress’s tax scorekeeper.
The Tax Policy Center, a think tank, has projected that if the cap were repealed, more than half the benefits would flow to the top 1% of earners and more than 80% of the benefits would flow to the top 5% of earners.
The new cap cost Mr. Biden and first lady Jill Biden roughly $352,000 in deductions in 2018, according to the returns Mr. Biden’s team released during the campaign.
Democrats who are eyeing a renewed push to fully restore the break say they’re simply representing their constituents.
“In high cost-of-living states like my district, SALT does, in fact, make a critical difference in helping make ends meet for our middle class,” said Rep. Mikie Sherrill, New Jersey Democrat.
“I’ve spoken to teachers and law enforcement officers who tell me that they depend on this deduction to afford the high cost of living in our area.”
Sen. Charles E. Grassley, Iowa Republican, introduced a standalone amendment during last month’s budget debate that would have prevented lifting the cap.
Mr. Grassley, a past chairman of the finance committee, said it made no sense to give “six-figure tax cuts” to the highest earners in high-tax states at the same time those states were looking to Congress for handouts.
“Taxpayers in fiscally responsible states like Iowa would be left picking up the tab for the wealthiest New Yorkers and Californians,” Mr. Grassley said.
Sen. Rand Paul, Kentucky Republican, joined with all 50 members of the Senate Democratic Caucus to vote no, killing the measure.
It’s not clear how much muscle Mr. Biden will put behind the effort to repeal the cap, an issue he supported during the 2020 campaign.
The White House made a major clarification on his broader tax plans when press secretary Jen Psaki said Wednesday that individuals making less than $400,000 per year wouldn’t see a tax increase under the president’s plans.
“This is a commitment he made on the campaign trail, which he is committed to abiding by,” she said. “Once we propose a tax proposal, we’ll have more to discuss.”
Ms. Psaki and the White House had said this month that the president’s $400,000 threshold applied to households or families, which would theoretically apply to a couple each making $200,000.
That fell short of what the president vowed on the campaign trail.
“He won’t ask a single person making under $400,000 per year to pay a penny more in taxes, and will, in fact, enact more than one dozen middle-class tax cuts that will finally give working families the financial support they deserve,” says a piece from Mr. Biden’s campaign website comparing his tax plan to former President Trump’s.
Among other priorities, Mr. Biden wants to increase the corporate tax rate from 21% to 28%, increase the top individual tax rate from 37% to 39.6%, and increase capital gains taxes on income of more than $1 million.
Some analysts question whether Mr. Biden’s tax plans can avoid indirectly hitting middle-class families, such as companies facing a higher corporate tax rate passing on the expense through higher utility bills or prices on consumer goods, even if they don’t see a direct tax rate hike.
“You are putting it up higher than communist China,” Grover Norquist, president of the conservative Americans for Tax Reform, said of the corporate rate.
The corporate tax rate in China is 25%.
“We’d lose all that lovely investment which came into American companies,” Mr. Norquist said. “These are a series of tax increases he is now threatening middle America with.”
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