Watch a recording of Truth in Accounting’s virtual event with special guest Steve Malanga, senior editor at City Journal. In this episode, we discussed the financial troubles of America’s largest cities and the effects of Biden’s infrastructure plan.
Author(s): Bill Bergman, Sheila Weinberg, Steve Malanga
The SALT tax deduction allows state and local taxes like property taxes to be deducted from federal taxes. The deduction is particularly beneficial to wealthy property owners in Democratic states, which typically have higher property tax rates. In 2017, the deduction was capped at $10,000 under President Trump’s tax reform bill, in what many saw as a Republican attack on blue states.
Repealing the SALT cap would cost the government $600 billion in revenue over nine years. That outlay would essentially negate any financial benefits from the Democrats’ proposal to raise the corporate tax rate from 21 percent to 25 percent, the party’s preferred alternative to Biden’s proposed 28-percent corporate tax rate. With all of the money from raising the tax rate being funneled back to wealthy homeowners, there would likely be little money left to fund Biden’s infrastructure package.
“I want to tell you this: If I become majority leader, one of the first things I will do is we will eliminate it forever,” Schumer said during a July 14 press conference on Long Island. “It will be dead, gone, and buried.”
“It” in this case was the cap on the state and local tax (SALT) deduction, which was imposed as part of the 2017 federal tax reform bill passed by Republicans and signed by President Donald Trump. As a result of that law, Americans are allowed to deduct a maximum of $10,000 in state and local tax payments from their federally taxable income; previously the deduction was uncapped, and it overwhelmingly benefitted the richest households while shifting their federal tax burden to everyone else.
Sen. Bernie Sanders (I–Vt.) is correct to point out, as he did in an interview with Axios this week, that the SALT cap creates a serious optics problem for Democrats. Sanders says he will oppose Schumer’s effort to attach the SALT cap repeal to the transportation bill because “it sends a terrible, terrible message when you have Republicans telling us that this is a tax break for the rich.”
We can see evidence of the market distortions that government subsidies cause in the market capitalization of electric-car maker Tesla—currently about $650 billion, or more than five times that of General Electric. Tesla benefits from many subsidies already, and the Biden infrastructure plan aims to divert even more to the electric-car industry. And by increasing the corporate tax rate to pay for part of these subsidies, the Biden plan will further distort the market by making the unsubsidized private sector even less attractive to investors.
The pandemic forced many businesses to adopt new technologies that could boostproductivity for decades. Productivity gains don’t always come so fast. It took more than 100 years for the steam engine, a transformative technology, to show up in productivity estimates, for example. The pandemic’s acceleration of this process of technological adoption means that we could be poised for a big burst of follow-on growth and innovation. But government interventions on the scale of the Covid stimulus and infrastructure bill threaten to divert these energies into less productive investments.
True, the added government spending will provide short-term benefits to workers in the form of new jobs building roads, bridges, and airports or retrofitting buildings with green technology. But using industrial policy to create jobs can also generate long-term risks for those workers, by steering them away from gaining the skills and experience the market may need in the future. Research has shown that workers for the Depression-era Works Progress Administration were less likely to take higher-paying private-sector jobs when they became available because they preferred the security of a government guarantee. In the long term, that can lead to wage stagnation and a population less competitive in the global market.
First, as I referenced in passing in my prior column, the long-lasting nature of infrastructure is what justifies paying for it over time. This proposal’s spending is meant to be accomplished over 8 years, with the tax increase funding it over 15 years. That could be justifiable for some types of infrastructure, when it is something new rather than ongoing maintenance, but is not at all appropriate for ongoing day-to-day spending.
The debate over Democrats’ next move on infrastructure, which Biden has put forth as part of his American Jobs Plan, and whether and how to pay for it through taxes, is just getting started. Plenty of proposals are going to be on the table, including SALT. The White House has signaled some openness to it, but the matter is far from settled.
“If Democrats want to propose a way to eliminate SALT — which is not a revenue raiser, as you know; it would cost more money — and they want to propose a way to pay for it, and they want to put that forward, we’re happy to hear their ideas,” White House press secretary Jen Psaki said at a press briefing on April 1.
According to estimates from the Center on Budget and Policy Priorities, if the SALT cap — which is set to expire in 2025 — were to be repealed earlier, it would overwhelmingly benefit those at the higher end of the income scale — the ones who were hurt by the bill back in 2017. The CBPP estimates that more than half of the benefit would go to the top 1 percent, and over 80 percent would go to the top 5 percent, of earners.