The buried boon to the wealthy in the Democrats’ tax plan

Millionaires stand to benefit immensely from the treatment of state and local taxes

12/4/2021 3:07:00 PM

The SALT exemption allows taxpayers to deduct property and state-income taxes when filing to the federal government

Millionaires stand to benefit immensely from the treatment of state and local taxes

.As its price tag has been slashed to $1.7trn over a decade, half as much as first pitched, the hunger—or squid—games between progressives and moderates have turned fiercer. (Against united Republican opposition and with no votes to spare in the Senate, any Democratic defection would scupper the bill.) This has mostly been to the benefit of the moderates, as senators like Joe Manchin and Kyrsten Sinema have wielded their veto threats to weaken or kill some mooted carbon-emissions limits, a paid-family-leave programme and tax rises for rich Americans and firms. But a lesser-known faction, the

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SALTCaucus, may have made out best of all.TheSALTCaucus is named after the “state and local tax” deduction. The exemption, which dates back more than a century, allows taxpayers to deduct property and state-income taxes when filing to the federal government. For much of its history, this exemption was limitless. That helped the well-to-do who faced big bills for their houses and incomes—and the high-income, high-tax states that received an implicit subsidy from the federal government. The subsidy cost $369bn (1.9% of

GDP) in 2017. It became less generous that year after Republicans passed legislation, signed by President Donald Trump, capping the deduction at $10,000 a year.For most Americans, this had little impact. According to the Internal Revenue Service, 87% of tax returns do not bother to itemise all their exemptions, which would amount to less than the standard deduction ($12,000 for a single filer in 2018). But legislators in high-tax states such as New York and California saw the reform not as a laudable effort to tax the rich (which it did rather well), but a punitive blow.

TheSALTCaucus was soon formed as a resistance movement. “This was explicitly designed to go after states that tax people to support better schools and services,” says Tom Malinowski, a Democratic congressman from New Jersey and aSALTCaucus member, who notes that in some towns in his district the average homeowner may owe $20,000 in property tax. Days before the

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BBBAct’s passage in the House, the caucus secured an increase in the limit on deductible expenses from $10,000 to $80,000 for the next ten years.This constitutes one of the biggest expenditures in the pending budget bill. And it is steeply regressive (see chart). It is dividing Democrats, who may yet push for significant changes in the Senate.

Over the next five years, the newSALTprovision would cost the federal government an additional $275bn relative to current law. That is much more thanBBBplans to spend on child-tax and earned-income credits that are intended to reduce poverty. Some proponents claim that the proposal is actually deficit-neutral over the next decade, though this relies on a shifty budgetary game. The Trump-era limit on

SALTexpires in 2026, so although a cap of $80,000 costs a lot until then, scorekeepers book it as a tax increase (relative to full deductibility) from 2026 to 2031.President Joe Biden has been emphatic thatBBBis a plan to revitalise the middle class. So it is an irony, argues Marc Goldwein of the Committee for a Responsible Federal Budget, a think-tank, that one of the priciest components of it “is a big tax cut that middle-class people and poor people don’t get at all”. Almost all the benefit is concentrated among the very rich.

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Modelling by the Tax Policy Centre, another think-tank, shows that the average benefit for the middle 20% of earners would be a measly $20. But those in the top 20% would receive an average tax cut of $2,100; the top 1% would get a cut of almost $15,000. The majority of the benefits would go to Americans earning more than $500,000 a year. Less than 9% would go to Americans making less than $200,000.

This is not just “a colossal waste of money on a regressive, distortionary tax break”, argues Richard Reeves of the Brookings Institution, another Washington think-tank, but “a form of fiscal self-harm, and, therefore, political self-harm”. Jason Furman, a former economic adviser to Barack Obama, has called it “obscene”.

The issue is inverting the usual positions on fair taxation. Mitch McConnell, the Republican leader in the Senate, is lambasting the “bonanza for blue-state millionaires and billionaires” and the fact that the bill gives “a net tax cut to 89% of people making between $500,000 and $1m”. Some pro-deduction Democrats argue that their own “maker states” deserve a break that cadging “moocher states” do not

Whether the change will become law is uncertain. For both the Democratic leaders in Congress, Nancy Pelosi of California and Chuck Schumer from New York (pictured), the provision would be a boon for their home constituencies. But some Democrats are incensed. Michael Bennet, a senator from Colorado, has called the idea “preposterous”. Bernie Sanders, another strident objector, is pushing to limit the deduction to those making less than $400,000 a year. He has not said whether he would be prepared to torpedo the whole bill over the measure.

The White House has been sheepish about the idea, which was not in Mr Biden’s original proposal. His press secretary recently offered this ringing endorsement: “The president’s excitement about this is not about theSALTdeduction; it’s about the other key components of the package.”

Read more: The Economist »

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