A proposal by vulnerable House Democrats to restore a lucrative deduction for wealthy blue state residents will cost taxpayers more than $200 billion by 2025.
The Joint Committee on Taxation detailed the figure in a Thursday report analyzing the tax proposals House Democrats want to include in President Biden’s social welfare bill. According to the analysis, restoring the state and local tax (SALT) deduction would cost the country more than $200 billion over the next five years.
SALT allows individuals annually to write off a portion of their state and local taxes. The lucrative tax break is utilized by residents from predominantly Democratic coastal areas, where the state and local tax burdens are especially high.
Former President Donald Trump’s signature 2017 tax overhaul capped the deduction to $10,000 annually. At the time, Republicans and good government groups argued the tax break was a giveaway to the super-wealthy.
Since the cap was put in place, moderate Democrats from the Northeastern and Western U.S. have been arguing for its repeal. The fight has mainly taken hold within the House, where a cadre of moderate Democrats have threatened to withhold their support from Mr. Biden’s social welfare bill unless it includes a fix for SALT.
“Red States put a cap on the SALT deduction to hurt us in Blue States,” said Rep. Josh Gottheimer, a New Jersey Democrat. “Middle-class families … need a tax cut. No SALT, No Dice!”
Mr. Gottheimer and other moderates initially wanted to repeal the cap permanently. After significant pushback, the lawmakers settled on a compromise that raises the cap from $10,000 to $72,500. The hike, which would be immediate and last throughout the next decade, has garnered the support of House Speaker Nancy Pelosi.
Mrs. Pelosi, a California Democrat, has argued that restoring the SALT deduction will be beneficial to all taxpayers.
The Joint Committee on Taxation disagrees, however. The panel, which is made up of 10 senior bipartisan lawmakers from both chambers of Congress, found that raising the cap to $72,500 would cost taxpayers upwards of $50 billion annually over the next five years.
After 2025, the year which Mr. Trump’s tax cuts expire and tax rates are hiked across the board, the deduction begins to generate some revenue. Overall, between 2022 and 2031 the net revenue boost is estimated to be only $2 billion.
SALT has long been lambasted as a giveaway to the rich, including by the nonpartisan Tax Foundation and the liberal-leaning Brookings Institution.
“Households making $1 million or more a year would receive half the benefit of repealing the $10,000 federal cap on the state and local tax (SALT) deduction,” a study by the Urban-Brookings joint Tax Policy Center found. “Seventy percent of the benefit would go to those making $500,000 or more.”
The study further found that 96% of middle-income households would get no tax reduction at all by restoring SALT. On the other hand, nearly 93% of households making more than a million dollars annually would receive a tax cut averaging $48,000.
That reality that SALT only benefits the wealthy is something that Democrats are struggling to reconcile.
Some far-left lawmakers, including Senate Budget Committee Chairman Bernard Sanders, are already opposed not only to a full restoration of the deduction, but also to the compromise being championed by House Democrats.
“It would be absurd and hypocritical to provide the richest people in this country with massive tax breaks,” said Mr. Sanders, a socialist from Vermont. “Completely eliminating the cap on state and local tax exemption is regressive and unfair.”
Mr. Sanders and Sen. Bob Menendez, a New Jersey Democrat, have unveiled a competing SALT proposal they hope is included in the White House’s spending package.
The Senate proposal as authored would permanently erase the cap for families making less than $400,000-per-year. For everyone above, the cap would remain in place, although upward adjustments are likely from the $10,000 figure.
“One of the many negative aspects of the Trump tax plan was to limit the deductions on state and local taxes to $10,000 that resulted in millions of middle-class and working-class families being forced to pay more in their federal taxation,” Mr. Sanders said. “That was a regressive and unfair proposal, and this Congress must rectify it.”
It remains to be seen whether either the Senate or House SALT proposals will wind up in the final bill.
For that to happen, all 50 Senate Democrats need to acquiesce since spending passage will pass using budget reconciliation. The process allows spending measures to pass the 50-50 Senate by a simple majority.