Even after losing the state and local income tax deduction, taxpayers in New York and other high-tax blue states would still end up ahead under the Republican tax reform bill, analysts say.
But that message is having a tough time breaking through the din in Washington.
Democrats have seized on the state and local tax deduction, or SALT, as their chief argument against the tax code overhaul, warning of an electoral backlash from middle-class suburbanites against Republicans if the plan is approved.
There is one problem: SALT is not a middle-class tax break. The benefit of the write-off goes overwhelmingly to high-income earners in high-tax blue states, several economists said.
“SALT is a classic tax preference for the rich that Democrats should be opposing,” said Brian Riedl, an economist at the conservative-leaning Manhattan Institute who has been studying the tax reform plans.
“The Democrats’ complaints are overheated,” he said. “Half of the benefits go to the richest 5 percent of earners, and nearly all families who would see their SALT deduction limited would receive bigger tax cuts elsewhere.”
An analysis of the Senate bill, which eliminates SALT, would deliver higher after-tax income by the end of the decade in high-tax states such as California, New York and New Jersey.
Middle-class families would have an estimated gain in after-tax income of $3,013 in New Jersey, $2,932 in California, $2,703 in New York and $2,701 in Illinois, according to a study by the nonpartisan Tax Foundation.
Nicole M. Kaeding, one of the economists behind the Tax Foundation analysis, stressed that 90 percent of those claiming SALT deductions make more than $100,000 a year.
“These individuals are not middle-class individuals. They are in the top 20 percent of all income earners. Even in New York City, median household income is $78,000, according to the U.S. Census Bureau,” she said.
The White House and Republican leaders argue that the nearly doubling of the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly would help offset the loss of SALT and other popular deductions.
Proponents of nixing the deduction for state and local taxes also say the current system subsidizes high-tax states such as California, New York and New Jersey. Eliminating SALT deductions would force those states to cut taxes, they say.
The House Republicans’ Tax Cuts and Jobs Act is scheduled for a floor vote Thursday. It includes a compromise to stop short of nixing the SALT deductions by allowing a write-off of local property taxes capped at $10,000.
Democrats and other critics on the left argue that getting rid of SALT, which has been in the tax code in one form or another since the federal income tax was imposed in 1913, would subject citizens to double taxation.
They say Americans shouldn’t have to pay federal taxes on what is essentially nondisposable income because it gets gobbled up by state and local government.
Democrats also point to studies showing rising taxes over time in those high-tax blue states, where residents earning more than $100,000 a year can be considered middle class.
An analysis by the Institute on Taxation and Economic Policy, a left-leaning think tank, found long-term tax decrees in every state except four high-tax states: California, New York, Maryland and New Jersey.
To discern the tax increases, the study looked at the impact of tax reforms in 2027 after some credits sunset. If no changes are made, then Californians would face $12.1 billion in added taxes, New Yorkers would pay $4 billion more, Marylanders would pay $430 million more and New Jerseyans would fork over an extra $137 million.
The other 46 states would still reap more than $101 billion in tax cuts in 2027 under the House bill, according to think tank.
House Minority Leader Nancy Pelosi, California Democrat, said the study underscored the choice Republicans from her state must make on Thursday.
“This week, the 14 California Republicans will decide whether to hit California’s families with the largest net tax hike of any state in America,” she said. “Fourteen California Republicans will decide whether to inflict a devastating tax hike on their own constituents. And after their deafening silence, any California Republican who votes for the GOP tax scam will be forced to answer why they care so little for their constituents.”
Armed with statistics of SALT deductions broken down by congressional districts, Senate Minority Leader Charles E. Schumer, New York Democrat, went after blue state Republicans in an effort to peel away support of the tax bill in the lower chamber.
He singled out Rep. Edward R. Royce, a California Republican from the affluent Los Angeles suburbs where 33 percent of taxpayers take the SALT deduction for an average savings of $15,000.
“He’d be committing political suicide” by voting for the House GOP tax reform bill, Mr. Schumer told reporters at the Capitol.
He also pointed to Rep. Barbara Comstock’s Virginia district, where 49 percent of residents use the SALT deduction for an average $13,000 savings; Rep. Erik Paulsen’s Minnesota district, where 40 percent of residents use it for an average $15,000 savings; and Peter J. Roskam’s Illinois district, where 38 percent of residents use it for an average $14,000 savings.
House Republican leaders expect to lose about eight votes from their party when the bill hits the floor Thursday, but that is not enough to put it in jeopardy.
Rep. Darrell E. Issa, a California Republican who won re-election last year by a razor-thin margin in his northern San Diego County district, has declared himself a no vote on the SALT issue.
“I didn’t come to Washington to raise the taxes on anybody. I’ve never voted for a tax increase, and I don’t want to start now,” he said on Fox Business Network.