The latest Washington buzz has the Senate likely voting on the bipartisan infrastructure deal and the federal budget resolution that will fuel President Biden’s big spending plans by sometime in August.
But the debate over the repeal of the state and local tax (SALT) deduction cap threatens to be the skunk at the Democrats’ summer spending picnic.
As I wrote previously on Right by the Bay, a group of House Democrats from high tax, high spending states are threatening to vote no on budget reconciliation legislation unless the SALT cap is repealed.
Biden, Senate Majority Leader Chuck Schumer, and House Speaker Nancy Pelosi find themselves in a huge political pickle.
Repealing the SALT cap would be a horrible political optic. It would take away tens of billions of dollars in revenue to pay for the budget reconciliation plan that will include long-sought liberal priorities – and give a tax break to Pelosi and Schumer’s wealthy supporters in California and New York.
“More progressive members of the Democratic party have criticized such a proposal as a tax gift to the wealthy, since 57 percent of the benefits would go to the top 1 percent of earners,” CNBC notes.
NBC News reports that “Democratic leaders have begun grappling with ways to placate that constituency.”
“A source familiar with behind-the-scenes negotiations said one idea under discussion among Democrats is to nix the cap only for those making $400,000 or less, but that nothing has been finalized,” the report notes.
Enter Sen. Bernie Sanders, the chairman of the Senate Budget Committee who will play a key role in crafting a SALT cap deal. His recently-released “$6 trillion budget included $120 billion for SALT relief over five years,” according to CNBC. The $120 billion would fund lifting the SALT cap for those making less than $400,000 per year.
Analysis by the nonpartisan Tax Foundation estimates that a full SALT deduction cap repeal would result in a $380.4 billion federal revenue loss through 2025.
Sanders told MSNBC recently that, “what I would support is the understanding that there are middle-class families in states where property taxes are very high that are paying a whole lot in state and local taxes, and I think we have to support them.”
Instead of trying to repeal some – or all – of the cap, Sanders should direct his ire at state legislatures who imposed these expensive tax burdens in the first place.
“When Congress capped this special interest tax break, millions received tax relief. Now Californians know how much Sacramento’s overspending really costs them,” PRI’s Wayne Winegarden wrote in his 2019 study on the SALT deduction cap, “Making it Rain in California.”
The study found that average tax rates for five income categories of middle and upper-income couples in high-tax states declined under the SALT cap, except for those earning $1.5 million. For example, married California taxpayers filing jointly with an income of $200,000 saw their marginal tax rate fall by 4.0 percent according to Winegarden’s research. Altogether, Winegarden calculates the SALT cap has reallocated over $650 billion in special-interest state tax breaks to broad-based marginal tax rate reductions.
So, if the SALT cap compromise rules the day, will the House rebels go along with it? Don’t count on it.
New Jersey Rep. Josh Gottheimer told CNBC that “even a $400,000 income threshold would hurt the middle class, since the super-earners in New Jersey and other high-tax states support social programs through their outsized tax payments (and) many of the rich appear to be moving out of the state looking to pay less in taxes.”
He’s right. But the solution is to demand California, New York, and other high tax states reform taxes and spending and reduce the tax burden on overtaxed residents – not facilitate a giveaway to wealthy taxpayers courtesy of the U.S. Congress.
Tim Anaya is the Pacific Research Institute’s senior director of communications and the Sacramento office.