As negotiations continue on a bipartisan infrastructure agreement, certain members of Congress from high-tax states are desperate to tack on a repeal of the $10,000 cap on the state and local tax (SALT) deduction. So desperate, in fact, that they’re inventing a fantastical narrative that they’re doing so on behalf of labor unions, not the wealthy.
The 2017 tax reform law (TCJA) placed a $10,000 cap on the SALT deduction, in recognition of the fact that the deduction overwhelmingly favored the wealthiest taxpayers and gave license to states to impose higher state taxes since reductions in federal taxes would reduce the bite. Before the cap was instituted, 84 percent of the benefits of the deduction flowed to taxpayers with adjusted gross incomes (AGIs) above $100,000.
Undoing this cap would clearly benefit the wealthy. Should the SALT cap be lifted, less than 4 percent of the benefit of the change would go towards the bottom 80 percent of taxpayers. Taxpayers with AGIs below $80,000 would receive a measly 0.7 percent of the benefits.
Yet somehow, for Democrats who have repeatedly criticized the TCJA for not being progressive enough (even though it made the tax code more progressive, not less), this is the change these representatives find most objectionable. These Democrats are even threatening to vote against the aforementioned infrastructure deal — not over tax hikes for the wealthy, but if it doesn’t include a massive tax cut for them.
These representatives have been working overtime to create a new narrative justifying their dedication to eliminating the SALT cap. Rep. Josh Gottheimer recently (D-NJ) called the SALT cap “a direct assault on hardworking men and women of labor,” while Rep. Jamie Raskin (D-MD) humbly equated his cause to Gandhi’s in calling for a “SALT march.”
Taxpayers shouldn’t be fooled by this ridiculous mythologizing. Democrats’ fixation with the SALT deduction has absolutely nothing to do with a principled desire to protect the incomes of lower-class Americans, who are about as concerned with the SALT deduction cap as they are with the estate tax rate. Instead, it’s an entirely cynical ploy to protect their states’ tax bases.
That’s because states that rely on high taxes on their wealthier residents rely on the SALT deduction to keep them from packing up and leaving. Before the SALT cap, high-tax states were able to soften the blow of constant tax increases somewhat by promising their residents that they could turn around and write off their higher state tax payments on their federal tax returns.
That means, in effect, taxpayers were underwriting a federal subsidy to high-tax states. High-tax states taxed their wealthy taxpayers more and the SALT deduction allowed them to pay less in federal taxes, meaning taxpayers elsewhere had to shoulder more of the burden. It was an entirely illogical and unfair system that deserved to be eliminated entirely.
With the compromise of a cap in place that allows lower and middle-class taxpayers to benefit from the deduction, high-tax states are feeling the consequences of their insatiable hunger for revenue. Fed-up taxpayers are fleeing to states that don’t view their residents as tax cows to be milked half to death, reducing the tax base and even political representation of high-tax states. As remote work becomes more of a viable working arrangement, this dynamic stands only to become more apparent.
Taxpayers should not be fooled by representatives of these states trying desperately to retain their federal subsidy. The SALT deduction is a bad deal for taxpayers — and undoing the cap would be an even worse one.