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Representatives from some of the most blue areas of the country have been fighting for a surprising cause in negotiations over the Democrats' huge social spending plan.
The state and local tax deduction (commonly known as SALT), allows taxpayers to reduce their federal tax bill by subtracting the amount they have paid in local and state taxes from their income. Although technically the SALT deduction is available to all, it has been historically most beneficial to those with high incomes who live in areas or states with high tax rates. The tax overhaul of Donald Trump, which was led by the Republican-led Congress, set a $10,000 cap on the deduction. This change had adisproportionate impact on blue states because they have the highest taxes and most wealthy residents.
Democrats from New York, California and New Jersey have been pressing for the repeal of the SALT limit to be included in the Build Back Better plan. Numerous studies have shown that almost all the benefits of repealing this cap would go to the wealthiest Americans. One analysis found that the top 0.1% of earners would receive an average tax cut greater than $150,000 while middle-income households would see a $37 savings.
Why debate?
Many Democrats are opposed to the SALT cap being removed by their colleagues, which is not surprising. One of the most vocal was Vermont's independent Senator Bernie Sanders, who claimed that repealing the cap would be a travesty of the party's vision, which is that the "very wealthy finally pay their fair share".
The government would lose as much as $85 Billion in tax revenue per year if the cap was removed. This money could be used to finance a number of programs under the social spending bill. Conservatives, who are usually pro-tax cuts, oppose the lifting of the SALT limit because they believe that it will encourage blue states and cities raise their local taxes even higher.
Continue the story
The cap should be lifted because it unfairly penalizes those who live in high-tax states. Senator Chuck Schumer, the New York State Majority Leader, said that the current system is similar to "double taxing", which takes money from local residents so they can invest it in their communities. Nancy Pelosi, House Speaker, stated that the cap has been "devastating” for residents in her home state of California ever since it was put into effect.
Although there was strong opposition from some Democrats to the reinstatement of SALT, there is a consensus within the party about the political motivations behind it. Sanders said that he is open to a compromise approach that allows pro-SALT members some relief for their constituents but does not limit the benefits to the ultra-wealthy.
Next steps
This compromise was included in the most recent Build Back Better plan. The cap would be lifted from $10,000 to $80,000 over the next ten years. However, it's still too early to tell if that plan will be accepted by the Senate or House of Representatives.
Perspectives
Repeal of the SALT cap would be against the core principles behind the Democrats' agenda
"Democrats have billed the president's agenda as a job-creating and social-safety-net-enhancing plan that would make the tax code more progressive. "... Retroactively repealing the SALT deduction limits would go in exactly opposite direction." -- Garrett Watson. Daily News.
A lower tax revenue means that less money is available to finance important programs
"Removing the SALT cap, even temporarily," also comes with a huge opportunity cost. The SALT cap repeal comes at a time when Democrats are cutting the President Biden's Build Back Better social expenditure bill to satisfy moderates. It is sucking up billions that could be used elsewhere." Howard Gleckman. Forbes
Congress should provide assistance to states that overtax their citizens.
"Blue state Democrats are fighting to restore the ability for wealthy residents in high-tax jurisdictions, to deduct their state taxes from their federal bills. It was a destructive policy for decades that forced low-tax residents to effectively subsidize tax and spending policies in more liberal states.
Inequality is fuelled by the SALT deduction
"By increasing the SALT deduction, Congress began to remove one pillar from a racist system that hinders racial equality. It should be destroyed. Let's instead fund programs that actually make America more equal." -- Alana Hackshaw and Michael Bader, Politico
There are better ways for states to make sure they have enough money to pay for social programs
"The SALT deduction is an inefficient subvention. The wealthy are the primary beneficiaries of this tax break. It would be more sensible to collect the money from the wealthy, and then to direct federal financial support for state and local governments." -- Editorial. New York Times
Democrats will have to pass some form of SALT Reform because of political pressure
"The top Democrat on the House is from California, and the Senate's top Democrat is from New York. There is plenty of incentive to repeal SALT. "... plus leadership has no other choice with the bloc of Democrats dedicated to a Salt fix." -- Ben Jacobs. New York
Conservatives should love SALT
The SALT cap is manna for national politicians who want to expand the federal government while simultaneously limiting the ability of cities or states to tax and control their policies. The cap basically turns the Founders vision of a federal government that has powers 'few, defined' on its [head] into a reality.
States are reluctant to invest in their citizens because they have capped SALT
"Allowing taxpayers the ability to deduct the full amount their state and local taxes from their federal tax returns is one the most powerful tools of the federal government for incentivizing States and Local Governments to invest in critical public service." -- Randi Weingarten, Edward A. Kelly, The Hill
SALT is also beneficial for the middle class
"You know what folks? The SALT cap doesn't just affect the rich. It also hurts homeowners with relatively modest incomes. This is something that not many people seem to appreciate or are willing to discuss. The cap has caused a decrease in the market value of many homes owned by homeowners with relatively low incomes." -- Allan Sloan from the Washington Post
There is room for a middle ground, which benefits the middle class, and not just the wealthy.
The SALT cap is a costly state, such as New Jersey. It has high property taxes and can also affect the middle class. "... It is difficult to find a compromise that protects middle class without giving the rich a windfall." -- Tom Moran Star-Ledger
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Photo illustration: Yahoo News; photos: Chip Somodevilla/Getty Images, Samuel Corum/Getty Images
