Democrats are trying to sneak in a massive and unnecessary tax cut for the rich as part of their Build Back Better plan. It's absurd.
Gary Haglund, Business Insider
Sat, November 6, 2021, 7:07 AM
In the Build Back Better plan, Congress has included a proposal to increase the cap on state and local tax deductions.
This is essentially a tax cut for the most wealthy Americans.
Congress must eliminate this deduction altogether; taxpayer dollars shouldn't be subsidizing the rich.
President Joe Biden, House Speaker Nancy Pelosi, and Senate Majority Leader Chuck Schumer have repeatedly stated that the so-called Build Back Better Act will be a historic investment in low- and middle-income families paid for by increasing taxes on the wealthy. Yet, while initially left out of Biden's Build Back Better framework, Democrats are looking to include changes to the cap on state and local tax (SALT) deductions in the final reconciliation bill. On Tuesday, reports indicated lawmakers were closing in on a deal to retroactively repeal the $10,000 SALT cap established in 2017 as part of tax reform. The following day, House Democrats offered a proposal that includes changes to retroactively increase the SALT cap to $72,500 through 2031. Both options would be regressive and a tax cut for the rich.
Doing away with the cap on SALT deductions would cost about $90 billion per year, while raising the $10,000 cap to $72,500 would cost over $50 billion per year through 2025, when the cap is set to expire under current law. Both proposals disproportionately benefit high-income households while providing little to no benefit to the lower-and-middle classes. It would make our tax code less fair and lead to tax disparities based solely on where you live.
Experts across the ideological spectrum, including the Tax Policy Center and Americans for Tax Reform, agree that repealing or increasing the SALT cap is regressive and poorly targeted, and yet lawmakers have brazenly argued that repealing the cap would be a boon to the middle class. That couldn't be further from the truth.
Only the wealthy will benefit from repealing the SALT cap
Let's see who actually stands to benefit from eliminating the SALT cap. According to the Brookings Institution, the top 20% of earners would receive 96% of the benefit, with the top 0.1% receiving an average annual tax cut of $154,000. The bottom 60% of earners, on the other hand, would see a meager 0.8% of the benefit.
Even if Congress decides to increase the cap rather than repeal it, the change would still be highly regressive. The Tax Foundation estimates that under a $72,500 SALT cap, 80% of the benefit would go to those earning more than $200,000, while just 2.5% would go to those earning less than $100,000. The highest earners, according to the Committee for a Responsible Federal Budget, would see a $23,000 annual tax cut. No matter how you spin it, SALT cap changes end up benefiting the wealthy at the expense of low-and-middle income households. In particular, SALT cap repeal would overwhelmingly benefit high earners from select states with high state and local taxes. One estimate concludes that more than 50% of the benefits of SALT cap repeal would accrue to just four states: California, New York, New Jersey, and Illinois.
As a simple matter of fairness, people with the same income and life circumstances should have the same federal tax liability. Reinstating the full SALT deduction makes that impossible. It would result in similarly situated people in low-tax states paying a bigger federal tax bill than those in high-tax states. Put more simply, people in low-tax states pay more for the same federal services. That's unfair and represents an income transfer from low-tax states to high-tax ones.
The government would have to raise taxes to pay for it
Including this tax cut for the wealthy in the reconciliation bill means there could be some other offsetting tax hikes to pay for it. A five-year retroactive repeal is estimated to cost the government about $475 billion in revenue by the time the cap expires at the end of 2025. To put that cost in perspective, the nonpartisan Joint Committee on Taxation estimated that increasing the top federal corporate income tax rate to 26.5% percent would generate $480 billion in revenue over the first nine years of enactment. That's nine years of revenue from one economically damaging tax increase to help pay for five years of tax cuts for the rich.
Raising the cap to $72,500 would cost $222 billion through 2026, but raises revenue by $2 billion through 2031. Because the current SALT cap is set to expire at the end of 2025, extending the cap through 2031 raises revenue in those latter years, giving the appearance that the SALT cap increase is offset. This amounts to nothing more than a classic Washington accounting gimmick.
The so-called Build Back Better Act has no shortage of bad policies. It would increase taxes on the middle class, reduce wages, increase prices, and shrink the economy. It would be inexcusable for Democrats to include such a blatant benefit to wealthy households, yet given other carveouts to special interests included in the package, it should come as no surprise.
Instead of repealing or increasing the SALT cap, lawmakers should eliminate the deduction altogether, or at the very least preserve the $10,000 cap established by the 2017 tax bill. Taxpayer dollars should not be spent to subsidize wealthy families who reside in states with high state and local taxes.
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Gary Haglund is a senior fiscal policy analyst at Americans for Prosperity.
This is an opinion column. The thoughts expressed are those of the author.
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