SALT Cap Revolt Led by N.Y. Democrats Snarls Biden Spending Plan
(Bloomberg) -- President Donald Trump’s 2017 tax law disproportionately targeted Democrats in high-tax states by eliminating a popular federal deduction. Now Trump’s legislative triumph has put President Joe Biden in a bind.
Newly released Internal Revenue Service data show the politically lopsided impact of the $10,000 cap on deducting state and local taxes, or SALT -- and why Democrats from the hardest-hit SALT states may be willing to cost Biden the crucial victory of passing his $2.25 trillion infrastructure and social services plan if he continues to insist on keeping Trump’s cap in place.
In some New York congressional districts, the average deduction lost because of the SALT cap can be more than $100,000 a year, according to the IRS data. And of the 40 congressional districts with the largest SALT deductions disallowed under the Trump tax law, 39 are represented by Democrats.
“I’m not voting for any change in the tax code whatsoever unless there’s the restoration of the SALT tax deduction. I’m laying that chit on the table,” said Tom Suozzi, a New York Democrat who’s emerged as a leader of a bipartisan SALT Caucus.
The demand by Democrats from high-tax states has complicated Biden’s hopes for party unity on his second major legislative effort, and heightened the real-world difficulties of paying for the massive infrastructure bill without raising taxes on the middle class, a key Biden campaign promise.
Democrats have a 218-212 majority in the House. With no Republicans likely to vote for a Biden-led tax increase, they can’t afford to lose more than three votes.
“Around here the operational question is how many votes do you have. We already have a lot of votes for this issue and it’s going to grow,” said Representative Anna Eshoo, a California Democrat. Nearly one-third of her constituents in a district that includes wealthy enclaves of Silicon Valley lost an average of $73,808 worth of deductions, the IRS data shows.
The White House has acknowledged a growing Democratic opposition but has so far resisted pleas to restore the full SALT deduction in Biden’s tax plan.
“Just with our little calculators out, it is not a revenue raiser. And so it would add costs -- and potentially significantly -- to a package. There’d have to be a discussion about how that would be paid for, what would be taken out instead,” White House Press Secretary Jen Psaki said last week.
Part of the administration’s objection is that the cap pays for parts of Biden’s plan. The cap helped raise $77.4 billion in the first year after Congress passed the Trump tax overhaul, according to the Joint Committee on Taxation, the bipartisan congressional committee that puts a price tag on tax proposals. Restoring the full deduction would cost $88.7 billion for 2021 alone, the committee said.
The effect of the $10,000 cap is unevenly distributed. For example, in New York Democrat Carolyn Maloney’s district, which includes the Upper East Side and other wealthy parts of Manhattan and Brooklyn, the 19% of her constituents who were eligible to claim the SALT write-off on average lost out on $100,405 worth of tax breaks. That would have amounted to as much as a $37,000 reduction in their federal tax returns.
In House Speaker Nancy Pelosi’s San Francisco district, 17% of taxpayers took an itemized deduction for state and local taxes, but those who did lost an average $53,471 worth of tax write-offs as a result of the cap, putting her constituents in the No. 6 spot of congressional districts who lost the most SALT breaks per itemizing taxpayer.
Read More: Top Congressional Districts Losing State and Local Tax Deduction
One in four of Suozzi’s constituents, on Long Island and in part of Queens, lost out on an average of $29,113 worth of deductions. He has introduced a standalone bill to repeal the SALT cap that has 96 Democratic and 10 Republican co-sponsors.
One of the the co-sponsors of his bill is Michelle Steel, a newly elected Republican representative from Newport Beach, California, whose district is the most affected of any held by the GOP. About 23% of taxpayers in her district lost an average deduction of $26,254.
Steel said she doesn’t see the issue as a partisan one. “It’s not hurting the blue states, because they’re still collecting their state income taxes,” she said. “It’s hurting the taxpayers themselves.”
Critics of the SALT cap say it amounts to double taxation. And in states like New York and New Jersey hard-hit by job losses from the pandemic, it provides another incentive for high-income earners to move to lower-tax states.
SALT deductions by nature benefit relatively few taxpayers. Nationwide, only about 11.5% of taxpayers itemize their tax returns, allowing them to claim the write-off. Beyond that, they have to incur state and local income levies and property and sales tax bills above $10,000 to be affected by the Trump limits.
Proponents of keeping the cap point to data that show it largely benefits the wealthy, whom the Democrats have targeted for taking on the bulk of the burden of paying for Biden’s infrastructure and social spending plans. More than half of the uncapped tax benefits flow to households earning more than $1 million a year, according to the Joint Committee on Taxation.
A study released Tuesday showed that the cap also would disproportionately benefit White families over non-White households, further complicating the Biden administration’s plans to make racial equity a core plank of any economic proposal. The study by the left-leaning Institute on Taxation and Economic Policy showed that more than 72% of the tax cuts from repealing the SALT cap would flow to White families, which account for 67% of all taxpayers, according to the study which is based on tax return and survey data.
The Politics of a Provision
In the 2018 midterm elections, Democrats were able to pick up several suburban districts around New York City and in Southern California, partly because of anger over the SALT cap, and now those House members say they need to follow through.
Last week, 17 Democrats from New York sent a letter to Pelosi saying they would “not hesitate to oppose any tax legislation that does not fully restore the SALT deduction.”
Yet Democrats are split between those who want to lower their constituents’ tax bills and progressives who want to avoid tax hikes for their lower-income districts.
Representative Alexandria Ocasio-Cortez of New York has called the SALT deduction “a giveaway to the rich.”
“I don’t think that we should be holding the infrastructure package captive for a 100% full repeal of SALT,” she said last week. “We can have a conversation on the policy, but it’s a bit of an extreme position, to be frank.”
Earlier: Pledges to Work With Congress on Ways to Ease SALT Cap
Her district comprises part of the Bronx and Queens, where only 7% of taxpayers claimed a SALT deduction in 2018, with the average lost deduction of $7,068.
Left-leaning think tanks have published scathing analyses of Democratic efforts to revive SALT. The Center on Budget and Policy Priorities said it would be an “overwhelmingly benefit high-income households.” The Brookings Institution calls it a “handout to the rich.”
Jared Bernstein, now an economic adviser to Biden, tweeted in 2019 that if people would’ve told him he’d be siding with Republicans over Democrats on a tax change, he “would have concluded you’d lost your mind.” Jason Furman, an economic adviser to President Barack Obama, has called restoring the SALT deduction a “waste of money.”
But anti-SALT cap Democrats are pressing forward with their attempts to restore the deductions anyway.
They say their middle-class constituents may look rich on paper, but the high cost of living in their communities mean many SALT beneficiaries are nurses, teachers and police officers.
“The SALT deduction was a lifeline to the middle class,” Representative Bill Pascrell, a New Jersey Democrat, said. “A year ago there was no hope, six months ago we started to have hope and now we are going to do this.”
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