Taxing Tuesday: The SALT Cap Battle Continues

Left v. Leftist... let them fight

For those relatively new to STUMP, you may not know that I used to have a weekly feature called “Taxing Tuesday” (in my pre-substack days). I’m not just about mortality here, but also public finance, especially tax policy!

Party!

Seriously, though, tax policy can be fun to watch, as with my soda tax series, one of the most idiotic tax concepts out there.

I am not planning on making this a regular weekly feature… unless current news justifies it.

It just so happens that tax policy debates are heating up again.

Nature is healing.

Democrats from high tax areas want SALT cap removed

Bloomberg, August 10: ‘Mr. SALT’ and N.J. Ally Fight Ocasio-Cortez to Revive Tax Break

A major push by a group of U.S. lawmakers to secure an expansion of the federal deduction for state and local taxes — which on Monday won inclusion in a critical budget plan — owes much to a pair of onetime roommates in the nation’s capital.

One, Tom Suozzi, has the nickname “Mr. SALT,” and the other, Josh Gottheimer, is co-chief of a sometime influential bipartisan House group known as the Problem Solvers.

Together, they’ve helped to gather a caucus of 33 representatives battling to remove or raise the $10,000 cap on SALT deductions imposed in the 2017 Republican tax-cut package. Success at getting that included in final legislation this fall would offer relief to middle and higher-income residents in higher-tax states such as New York and New Jersey.

So, before we dive into the debating points, I want you to think about a $10K deduction for state/local taxes, and “middle income” residents.

What middle-income folks need the SALT cap raised?

For the entire U.S., the median household income was $68,400 in 2020, up from $63,030 in 2019. I assume the large step up was due to federal stimulus checks.

The standard deduction for married couples filing jointly was $24,800 in 2020, and for heads of households was $18,650.

Remember that marginal tax rates were reduced as well.

This is all to say: almost all the people who “need” an increase in the SALT cap are not “middle income” in any meaningful definition of the word. That’s true even for New York and New Jersey. Because NY is huge and has a large upstate region of lower incomes, just looking at New Jersey, we see that the median household income, when the householder is 45 to 64 years old, is about $101K.

Okay, so what people with that range of income really got hit by the SALT cap?

Back when the taxes were initially being figured out, I tested out various combinations with a Tax Foundation calculator, and found that, generally, only very high income people were going to be paying more in taxes due to the TCJA, just that they didn’t get as much of a tax cut as the people who lived in low-tax areas.

You will often see these politicians speaking in generalities, because if they get specific about the people who were hurt by the TCJA, you will see that it’s not very sympathetic if you’re purportedly for “tax the rich!” policies. Most of the people adversely affected will sound pretty rich to most people. Just because they may be living in communities where everybody around them has that level of income, they don’t feel rich.

Which reminds me, check out this article in Vanity Fair: RICH PEOPLE OF THE HAMPTONS HAVE A NEW HEADACHE: EVEN RICHER PEOPLE

So now you know why people with million-dollar incomes might characterize themselves as “middle income”.

Representing their districts

Back to the Bloomberg article:

Suozzi brings the perspective of a former local official to a deduction that’s viewed by the SALT caucus as vital to supporting the economies of higher-tax areas that are in turn critical to national output.

“For us, this is an existential threat,” explains Gottheimer, who in pre-pandemic days shared living quarters with Suozzi when the two were in the capital. “If the tax base leaves, if well-to-do people leave, that drains the tax base and hurts the programs we all care about.”

Suozzi’s district includes portions of Long Island and Queens and Gottheimer’s spans the northernmost portions of New Jersey. The two both took office in 2017, months before President Donald Trump signed the tax bill that included a SALT cap to help pay for federal corporate and income-tax cuts.

Suozzi, 58, and Gottheimer, 46, have amassed enough support that Biden’s economic agenda can’t pass the House without addressing their demands, provided their block of Democrats stays united.

Okay, to not be too snide here, these representatives are doing exactly what they should be doing: representing the interests of the people of their districts.

This helpful site provides all sorts of statistics by Congressional district.

According to their data, Tom Suozzi’s district, NY-3, has a median household income of $120K. Gottheimer’s district, NJ-5, has a median household income of $110K.

I decided to do a sort of their list by median household income, and here’s the top 50 (there is some overlap between snapshots):

By the way, the Washington, DC rep is in there, Eleanor Norton, at position #47. As she can’t vote, I pulled it down to 51 in this ranking to get 50 “real” congressional districts.

Observations:

  • Of the top 50 congressional districts by median household income, they are represented by 42 Democrats and 8 Republicans.

  • The top 17 districts are all represented by Democrats. You have to get to #18 to get to your first Republican.

  • Nancy Pelosi’s district is at #4. That must burn her britches. Do better, San Franciscans!

  • Suozzi’s district is at #5.

  • Gottheimer’s district is at #16.

  • With respect to states, we have:

    • California 15

    • New York 8

    • Massachusetts 5

    • New Jersey 4

    • Virginia 3

    • Maryland 3

    • Illinois 3

    • Texas 3

    • Washington 2

    • Pennsylvania 1

    • Connecticut 1

    • Georgia 1

    • Minnesota 1

For the record, my own district, NY-18, is at #48. Just in under the wire! (but beaten by Eleanor Norton’s district of DC – OH WOE!)

Looking at this list, we do see a lot of high-tax locations, and if we dug further and looked at local taxes in those specific districts, you would also find it very high.

Not all, but plenty. So I understand what’s in it for them.

What’s in it for the rest of us (them)?

I suppose I’m part of the “them” and not the “us”, and let me not get too bogged down in all the referents of pronouns (and here you thought only gendered pronouns cause trouble!)

So yes, if the SALT cap were re-instated and nothing else changed, I would benefit directly. That said, I’m expecting marginal tax rates to increase, so putting back the SALT cap may not help me at all — it’s just a giant shell game.

With the 2017 TCJA, it turned out I had a small tax cut, but some of that may be due to loss of income after I quit a side job when Stu was diagnosed with cancer. My main point was, though, that between the marginal tax rate reduction and the SALT cap, it was essentially a wash. The 2017 TCJA didn’t hurt me. It just didn’t help me as much as all those people who lived in low-tax locales.

And I’m fine with that. I knew what I was getting into when I moved to New York from North Carolina.

So yes, the reps really are representing the interests of their districts, though when other tax changes come through, they may not be helping them all that much.

And here is the argument they’re making to the people outside their group:

Suozzi, a lawyer and CPA, and Gottheimer, a former speechwriter for Bill Clinton who has worked for Microsoft Corp. and Ford Motor Co., have argued that limiting the SALT deduction hurts residents in their districts and others like them because it raises taxes on middle-income earners who aren’t able to claim all their property and income taxes against the federal tax bills.

They argue it prompts wealthier people to move to low-tax places like Florida and Texas, which hurts their state’s ability to fund robust social services, an issue that should be a concern to both moderates and progressives.

…..
“This is not a giveaway to the rich — this is an essential feature to our progressive states,” Suozzi said. “The only way we can hold our majority, or expand our majority, is to address this issue.”

Except it is a giveaway to these rich districts.

Living in one of these rich districts, I’m going to be blunt: the reason I don’t mind paying high taxes is that our community gets value for money, and I’m not joking. I have services available for my son that I would not be able to get in North Carolina (and I’ve told NC friends to move up to NY to get the same services as we get… but they balk at the tax levels.) We have awesome snow-clearing. We have a fabulous town supervisor (who is a Republican, but that’s not the most salient fact) who bitches at our monopolistic utilities to make sure we get downed trees taken care of, lines repaired, etc. This town supervisor is a retired electrical engineer (from IBM), as my dad would have been were he still alive.

Our local taxes are absolutely getting plowed back into our locality, and our state taxes do come to us a lot as well. We’re not doing a huge amount of subsidization of anywhere but NYC. And I benefit from that as well.

But people in non-New York places? What do they get from my SALT deduction?

These arguments remind me of an anecdote from my childhood. We each had $160 from Christmas cash gifts from relatives and we were at the Mall. My ma had about $20 on her to buy a bra.

My middle sister: Please give me $40 so I can have an even $200.

Our mother: I only have enough to buy a bra.

Me & youngest sister: [laughing in middle sister’s face]

It was not a very convincing argument.

[That middle sister is now an accountant, btw, and is good with money. Don’t judge by our behavior as kids. This is one of the many stories we re-tell to laugh at ourselves. I should tell the ones where I’m goofy, and me doing a mini-Mike Wallace impression has got to be one of the best. But that’s for another time.]

And what’s hilarious to me is that the SALT cap warriors are not arguing with Republicans, who obviously put the SALT cap in place to begin with. They are arguing with the progressives. In their own party.

Some of whom are in districts not that far away from the SALT cap destruction crew.

Left-v-leftist… FIGHT!

Brookings: 

Note to Bernie: The 8 arguments for restoring the SALT deduction, and why they’re all wrong

For simplicity, let me edit it down to the 8:

1. “Democrats want to lift the SALT cap because it was enacted by Republicans who wanted to unfairly punish blue states. Why are you supporting a dirty political move by the GOP?”

2. “Lifting the SALT cap is good because blue states are ‘donor states’ to red states. It is only fair for blue states, who are net contributors to federal coffers, to get a break on their taxes.”

3. “The SALT deduction protects against double taxation. Why are you in favor of double taxation of U.S. citizens?”

4. “The SALT deduction allows states the fiscal room to spend. Without SALT, there would be a ‘race to the bottom’ in terms of state tax rates and a decline in state spending—netting a regressive result.”

5. “Democrats need to win as many rich suburban voters as they can. I would much rather lift the SALT cap than risk the Republicans winning votes in these areas.”

6. “Millionaires will flee from high tax states like New York and California and hurt state revenues—leading to less money for progressive state spending”

7. “Money doesn’t go as far in expensive cities. The people who would benefit from lifting the SALT cap really aren’t that rich.”

8. “We can just lift the SALT cap and pay for it with progressive revenue raisers, such as higher marginal rates.”

What I love about what these guys have to say is that they’re on board with my favorite policy: removing the SALT deduction entirely:

So, there are some arguments for lifting the SALT cap, and not all of them are silly or specious. But even the best arguments for raising the cap are weak. Any of the goals listed by those arguing for its removal could be reached more efficiently and equitably in other ways. Far from seeking to restore the deduction, even if only in part, Congress should be moving towards its abolition.

Yes! SALT cap zero! Now!

FWIW, the senior author of this piece, Richard V. Reeves, sounds pretty traditional liberal to me. Maybe he’s “progressive” (though that type is usually not to be found at Brookings), but I doubt it. He’s definitely not conservative or right-wing in any meaningful sense. He wrote the book Dream Hoarders which sounds like porn for the folks who are the audience for those “my kid can’t get into Harvard!” whiny pieces that run in the NYT and WSJ each April.

Considering Bernie Sanders: Vermont is not high-income compared to New York, that’s for sure. The very small state has a median household income close to the national average. It has only one representative, and two senators (like all the other states).

It looks like Bernie Sanders has been looking for a compromise, in which the SALT cap is raised, or some people don’t get to remove it:

A sign that a potential SALT compromise is in the offing was Senate Budget Chairman Bernie Sanders, I-Vt., setting aside just $120 billion for relief from the $10,000 cap in a draft budget outline. The JCT has told Suozzi’s office that his bill to repeal the cap would cost $385 billion.

…..
“We’re looking at various options,” Sanders said last week. “In high-tax states, it is fair that people can take a serious deduction. On the other hand, when you’re looking at billionaires that own multimillion-dollar mansions, should they be able to get the complete deduction? No.”

What’s hilarious is that Bernie et. al. really want a wealth tax, but can’t really think of practical ways to go about it.

Hint guys: if France couldn’t make a wealth tax work, you’re not going to be able to.

Prediction: Pain

Anyway, between the money machine going brrrrrrr and really driving inflation, and the Democrats trying to figure if anybody at all in their party is in charge, I’m just trying to figure out how I’ll be screwed in both the short- and long-term.

In any case, going back to Suozzi’s argument that, if they are to maintain or expand their majority, the Democrats have to repeal (or at least lift) the SALT cap, I will just note the following graph, which shows the number of Dems & Repubs (I’m ignoring the independents) over, oh, the last 20 years. (Source: https://history.house.gov/Institution/Party-Divisions/Party-Divisions/)

Lots of back-and-forth, I notice.

In any case, Democrats, many of those who “need” the SALT cap are in “safe” Democratic seats (like Pelosi). AOC gets to profundicate over this, as she’s in a safe Dem seat where the income level is middle income (for the U.S.): a median income of $67K. She might have to worry about being primaried, but it won’t be over the SALT cap.

In any case, a lot of these suburban liberals who find that the progressives are taking their precious tax money and spending it on other people as opposed to our local communities are quite conservative, if they actually thought about it.

Horrors.