According to the Tax Foundation, just 13.7 percent of filers itemize their deductions — a prerequisite for deducting state and local taxes. Only at the top 10 percent of the income distribution do even a majority of taxpayers itemize. But among the top 1 percent of taxpayers, 92 percent do, and of course, their higher marginal tax rates make each deduction more valuable.
So it is these taxpayers whom the SALT deduction primarily benefits. According to Maya MacGuineas of the Committee for a Responsible Federal Budget, households in the top 0.1 percent of earners would receive an average benefit of about $150,000, while those in the middle would get closer to $15. Repealing the caps would cost about $350 billion by 2026, and an estimated 85 percent of that revenue would end up in the pockets of the richest 5 percent of Americans.
You can probably think of many better uses of taxpayer money than giving a tax break to the most affluent people in the most affluent parts of the most affluent states in the country. Unless, of course, you are someone who would benefit from a larger SALT deduction. As, I admit, I would.
I am no billionaire. But like Mr. Buffett, I am willing to take one for the team. So as Democrats in Congress come under pressure to roll back the $10,000 cap on the federal tax deduction for state and local taxes, or SALT, this long-suffering resident of New Jersey offers his own Buffett-like message:
Don’t do it. Make me and people like me — those who choose to live in high-tax states — pay our full, fair share of federal taxes.
Such an approach accords well with what Mr. Biden has been saying about taxes and the wealthy. In his most recent remarks about his Build Back Better plan, the president said he’s “tired” of the rich not paying their “fair share.” And he attacked the 2017 tax cuts passed under Donald Trump as a “giant giveaway to the largest corporations and the top 1%.”
But that’s exactly who would benefit most from any expansion of the SALT deduction. According to the Tax Policy Center, 57% of the benefits of eliminating the cap on the SALT deduction would go to the top 1% of filers. The same researchers likewise reckon that the top 1% would get an average tax cut of more than $35,000 — against just $37 for middle-class taxpayers.
The Biden administration will need practically every Democratic representative in Congress to vote for its proposed $2 trillion package of tax increases, which would be the largest in 54 years. To gain that support, the president may have to season his legislation with some SALT. The bill, which raises corporate taxes and boosts capital-gains levies, among other things, doesn’t restore the full federal deduction for state and local taxes that Donald Trump’s 2017 tax-cut bill capped.
Democrats in key high-tax blue states, including New York representative Tom Suozzi and New Jersey representative Josh Gottheimer, have been complaining that Trump’s tax bill placed an undue burden on their states’ residents. Some have vowed not to support any tax legislation unless it reinstates the full SALT deduction. The problem: federal data show that restoring the deduction would overwhelmingly profit rich taxpayers—and lawmakers in many blue states have already raised their own levies on the rich.
Subsequent data have shown that the SALT changes fall heavily on the rich, while the vast majority of taxpayers in high-tax states have benefited from the Trump cuts. An analysis of 2018 New York tax returns found that the number of residents subject to the higher rates of the Alternative Minimum Tax declined to just 0.2 percent of all returns, down from 5.9 percent in 2017. Thanks to the doubling of the standard deduction, the number of New Yorkers itemizing their deductions shrank by nearly two-thirds that year, according to an Empire Center report. A recent report by the left-of-center Brookings Institution found that 57 percent of the benefits of restoring a full SALT deduction would go to the top 1 percent of households, providing them with an average tax cut of $33,000.
House Democrats continue to search for a way to satisfy lawmakers who want to scrap the deduction limit on state and local taxes without losing progressives wary of a tax cut that would overwhelmingly benefit the wealthy.
The budget blueprint Democrats passed this summer instructs lawmakers to include some form of SALT cap relief in a tax-and-spend plan of up to $3.5 trillion.
A full repeal would be costly and politically difficult to pass with razor-thin margins in both chambers. But a coalition of lawmakers from New York, New Jersey, and other states with high tax rates continue to insist that is what it will take for them to back the legislation.
Suozzi is one of the leaders of the “SALT Caucus”, an alliance of more than 30 lawmakers who want to roll back the $10,000 deduction limit established in the Republican-led 2017 tax law. While they argue that the cap unfairly targets Democrat-dominated states and encourages people to move to Florida and other low-tax states, progressives counter that expanding the deduction shouldn’t be a priority in a social spending bill because the lion’s share of the benefit would go to the wealthy.
That  bill passed the House, but 16 Democrats voted against it, including New York Representative Alexandria Ocasio-Cortez, who has described a full repeal as a “gift to billionaires.” Democratic leadership is dealing with a much narrower majority this Congress and can’t afford to lose that many votes with no Republicans expected to support the reconciliation package.
The SALT provision of the 1862 tax disappeared with the income tax itself in 1872. It returned, on paper if not in practice, when the income tax was briefly revived in 1894 (before being struck down by the Supreme Court in the 1895 Pollock decision). But when the income tax returned for good in 1913, it brought the SALT deduction back for the long haul.
Over the decades, the deduction evolved to reflect its fiscal environment. When states began to rely on sales taxes, the deductibility of those levies in the federal system was made explicit. The introduction of the standard deduction in 1944 also reshaped the SALT deduction, reducing its scope dramatically (and shifting the distribution of its benefits up the income scale). Later revisions in the 1960s and 1970s modestly curbed the deduction, but it remained largely intact through the 1980s.
Its survival, however, did not reflect any sort of elite consensus that the deduction was a good idea. Indeed, policy experts were increasingly hostile to it. In earlier decades, the deduction had escaped careful scrutiny, perhaps because it was widely perceived to be necessary in a system marked by high marginal rates; many experts believed that absent the deduction, the combination of federal and state income taxes might have approached confiscatory levels.
But PTE taxes create inequities based on type of income. For example, because these states now favor pass-through income over wages, a partner in a law firm can be effectively exempt from the SALT cap while an executive assistant or associate in the same firm remains subject to the deduction limitation. A doctor who is an employee of a corporation is barred from fully deducting state and local income taxes while a partner in a medical practice making the same income is exempt from the federal cap for these taxes.
Because the rules differ across states, businesses need to consider where partners live and where business income is generated. For example, non-resident partners might not benefit from the credits in their home state. Like New York, some states of residence allow credits against the taxes these partners owe from other states. But that isn’t always the case.
Keep in mind that these PTE taxes may be just a temporary fix. Congress may consider changes to the SALT cap in coming legislation. And the cap, along with all other individual tax changes in the TCJA, is scheduled to expire at the end of 2025.
Colorado recently became the 14th state to enact the new workaround, which allows (or in Connecticut’s case, requires) pass-through businesses to pay state income taxes at the entity level rather than on their personal income tax returns. For small businesses like partnerships, declaring that income as a business instead of passing it through to their individual tax returns means the state taxes paid on that business income don’t count toward their SALT cap.
The new mechanism is called a pass-through entity (PTE) tax, which is exempt from the $10,000 cap on the state and local tax (SALT) deduction that was part of President Trump’s 2017 tax reform. For business owners in high property tax states like New Jersey and Connecticut, it’s a critical change because it allows those taxpayers to deduct more of their local taxes from their other personal income.
We have argued against lifting the $10,000 cap in the New York Times, the Washington Post, and in a short analysis for Brookings. Our case is quite straightforward: the benefits of repeal would flow to the rich and affluent, who now have a disproportionate influence on the Democratic Party. To be specific, the top 1 percent would get an average tax cut of over $35,000. The middle class would get an average tax cut of about $37 (note that our analyses here relate to full repeal, since we do not know yet what alternative Sen. Sanders has in mind):
Three years after the passage of the 2017 Tax Cuts and Jobs Act, partisan mischaracterizations have left the law deeply misunderstood. The tax cuts benefited typical American workers through direct tax cuts and higher wages. The changes did not raise taxes on the middle class, did not devastate home prices, and did not reduce charitable giving. Businesses have created domestic jobs, and the new 21 percent corporate tax rate still leaves American employers paying rates higher than most competitors. As the law begins to expire in the coming years, lawmakers will be better able to assess the merits of keeping the tax cuts if they understand 12 common myths.
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.”