SALT Cap Tussle: NY Democrats Have an Ultimatum
Left vs. Lefter
Democrats are revving up to undo Trump-era tax levels by jacking up the rates, but wait, here are some Democrats claiming the taxes are too damn high:
Gov. Andrew Cuomo’s spin on the tax hikes in the state budget approved this month is this: they won’t really count when the $10,000 cap on state and local tax deductions is repealed by Congress.
But it’s not entirely clear when, or if, that cap put in place as part of the 2017 federal tax law will actually be thrown in the wastebin by the narrow Democratic majorities in Congress.
New York’s own Democratic House delegation on Tuesday nevertheless kept up the cause. A letter released by Reps. Tom Suozzi and Jerry Nadler, signed by 15 Democrats from New York, sent a warning to their leadership: they could wind up opposing future tax bills if the cap is not repealed.
For those new to my point-of-view: I live in very high-tax Westchester County, New York, and work for a Connecticut employer. My state & local taxes go over the current $10K cap by more than 100%.
I think the SALT cap should be zero — that is, I don’t think state and local taxes should be deductible for individual federal income taxes.
But, for this post, my personal opinion is irrelevant. I am certainly not a Democrat, and battles between Democrats are where the action is right now.
The argument from the New Yorkers
Here is the tweet-sized argument from Jerry Nadler:
Many people discovered various logical ends to that argument:
Rep. Nadler @RepJerryNadlerNo one should ever be taxed twice on the same income. It's not fair and it's not just. Proud to lead seventeen Members of the NY House delegation—alongside @RepTomSuozzi—in demanding that any coming tax legislation restores the SALT deduction. https://t.co/eOB6QPVrOT
Yes, it’s a mess, but it is absolutely what he meant to say.
But here’s the real answer:
The rich would benefit most from removing the SALT cap
For a long time, the deductibility of state and local taxes from federal income taxes has shielded local politicians from states such as New York from getting the full taxpayers’ wrath whenever they raised tax rates on income and property. Oh well, it’s somewhat deductible, so even if the rate is doubled, the ultimate hit on any given person will not be doubled.
Now, the sorts of people who got the most oomph from SALT deductibility were high-income folks, for obvious reasons. They tended to be the ones paying the most in state & local taxes, and then there’s the progressivity of federal income tax rates.
So, it is hardly surprising that any quantification shows lifting the SALT cap benefits high-income folks the most.
The Tax Foundation folks did not merely note where people land on income levels, but also where they lived. Removing the SALT cap would affect people in all states (even Texas and Florida have property taxes, after all, even if they don’t have income taxes), but it’s a matter of how much SALT is in each locality as well as where incomes land in that state.
Using the Tax Foundation’s own numbers, here’s a map of the SALT cap removal impact:
It’s not just a matter of the state/local tax levels for each state, but also what income levels are like for the state.
In any case, the pattern of which states’ taxpayers get the biggest boost from SALT deductibility might surprise you a little, such as with Utah and Georgia. But many aren’t surprising at all, such as New York and New Jersey.
But even without considering the geographical footprint, obviously high-income folks get the biggest boost from removing the SALT cap. This has been known since the TCJA back in 2017 when they imposed the cap to begin with. It’s partly why it was done.
It’s not just conservatives who know this little factoid now. The lefties know it, too. And that’s the basis for the current Democratic infighting. (One of the many bases for disputes, but this one is big due to it being about money)
Using the usual arguments against those who lower taxes
What is amusing to me is that the lefties are using the argument that’s used against conservatives all the time when they want to lower taxes: rich people get most of the benefit.
As a conservative, I say duh. I have no problem with that.
But Democrats use that argument against Republicans all the time, and I bet they weren’t expecting it to be used against themselves.
Progressive Democrat Alexandria Ocasio-Cortez said Biden’s infrastructure-and-spending plan shouldn’t be held hostage to demands to repeal the cap on deductions for state and local taxes that are being made by some of her fellow New Yorkers and other representatives from high-tax states.
She called abolishing the $10,000 limit on SALT deductions “a giveaway to the rich.” The New York representative said that while there could be “a conversation” about adjusting the cap to help taxpayers who are deeply affected — mostly in Democratic-run states like New York, New Jersey, California and Illinois — a full repeal is going too far.
“I don’t think that we should be holding the infrastructure package captive for a 100% full repeal of SALT,” she said. “We can have a conversation on the policy, but it’s a bit of an extreme position, to be frank.”
Coming from her, that is hilarious.
“The vast majority of the benefits of repealing the SALT cap would go to the people at the very top. It would also be costly — and for that amount, we could finance much more worthy efforts to support American families and workers. We can say we are for a progressive tax code and for fighting inequality, or we can support the SALT deduction, but it is really hard to do both,” said Sen. Michael Bennet (D-CO) in a statement to Vox. When the Senate took up a vote on whether to repeal the SALT cap in December 2019, he was the only Democrat to vote against it.
Prior to the 2017 tax bill, about 30 percent of taxpayers itemized deductions on their federal returns, including claiming the SALT deduction. The higher-income the household, the likelier the deduction: In 2017, 16 percent of taxpayers with incomes between $20,000 and $50,000 claimed the deduction, compared to two-thirds of taxpayers in the $100,000 to $200,000 threshold and 9 in 10 taxpayers with incomes above $200,000. After the 2017 law, the proportion of people who itemize deductions on their taxes fell to about 10 percent, and an estimated two-thirds of them have an income of over $100,000. “Those that continue to itemize are generally high-income taxpayers,” Sammartino said.
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.
None of these people being quoted are conservative.
They’re simply being consistent with their “tax the rich” philosophy.
What’s very funny to me is that the Democrats from the high-tax locations are using arguments that Republicans had used re: taxing high-income folks in the past. And they’re getting their old rebuttals shoved right back at them from people in their own political party.
As the Vox article notes, it’s not really a partisan issue on a national scale so much as a local politics issue. They call it geographic, but it’s really just how high-income and high-tax a location is in reality, which is a matter of political choice.
There is a certain geographic component in that it truly is more expensive to live in the north than the south, because it costs more to heat than to cool. But beyond that, there are few geographic features that make a government inherently expensive. Why is Illinois so much more expensive than Indiana? It’s not location.
It will be interesting to see how far this infrastructure bill gets without any SALT cap shenanigans. I don’t think this SALT cap ultimatum from the New York Democrats will do much, but hey, what do I know.
It’s money machine time now.
Related news stories:
SALT cap stories at Actuarial News