Eliminating the state and local tax (SALT) deduction cap was always the worst of Democrats’ ideas for the long-awaited reconciliation package. While ideas like a billionaires’ tax, letting the IRS snoop on regular Americans’ bank accounts, and massive corporate and capital gains tax hikes are all awful, eliminating the SALT cap had the unique distinction ofactively working against the stated progressive goal of addressing wealth inequality. When crunch time came and Democrats had to figure out what their reconciliation package could realistically include, it should have been the first thing to go — if it wasn’t gone well beforehand.
But it isn’t. Rep. Josh Gottheimer, who previously referred to the SALT cap as a “direct assault on hardworking men and women of labor,” tweeted that eliminating the SALT cap was going to be a part of the final reconciliation bill. That’s a serious enough unforced error on Democrats’ part, but they’ve managed to make it even worse.
One of the sticking points on eliminating the SALT cap is that it is hugely expensive in budget math, effectively representing a massive new tax deduction for the very wealthy. Marc Goldwein at the Committee for a Responsible Federal Budget estimates that the SALT cap repeal would be the largest part of the Build Back Better bill, far outstripping tax reductions earmarked for the Child Tax Credit or Earned Income Tax Credit.
For all that lost revenue, Democrats would get a tax change for whichmore than half of the benefit would go to the top 1 percent of taxpayers. The bottom 80 percent would see less than 4 percent of the total benefit.
So Democrats have sought to get around that issue the way Congress usually deals with unpleasant budget math — through gimmicks. Rather than covering the budget impact of the reinstitution of the full SALT deduction through cutting spending or even tax hikes elsewhere, Congressional Democrats would simply fool budget scorekeepers like the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) into scoring it as deficit-neutral.
They reportedly will achieve that trick by repealing the SALT cap for five years until 2025, then reinstating it for the remaining five years of the ten-year budget window. The CBO and JCT would grade the five years of the “reinstated” SALT cap as raising roughly the same amount of revenue as the previous five uncapped years will “cost,” making it “deficit-neutral.”
In a bill full of gimmicks, this one takes the cake. Obviously, the Democrats who pushed so hard to eliminate the SALT cap in no way intend to allow it to be reinstated come 2025, they just want to mask the enormous budget impact. In fact, come 2025, they could theoretically do the exact same thing — eliminate the SALT cap from 2026-2030, then “reinstate” it from 2031-2035. Rinse and repeat, and you have a tax deduction that reduces revenue substantially and yet technically never “costs” anything according to the budget math Congress forces scorekeepers like the CBO to use.
But even aside from budget gimmicks, there’s a major structural flaw that makes this version of the SALT cap repeal even worse than others: namely, most of 2021 has already happened, yet the proposal to repeal the SALT cap would repeal the cap for the 2021 tax year as well.
Retroactive tax changes, even cuts, create uncertainty about tax burdens. Taxpayers should know going into the year how the tax code will affect their finances and not have to worry that Congress will upset those calculations with back-dated changes. Should this reported SALT deal hold, you can expect that many wealthy taxpayers will receive a hefty refund check from the government come next April, as any withholding they did doubtless did not account for a reinstituted full SALT deduction.
The process of crafting the reconciliation bill has been far from a model of thoughtful policymaking up to this point, but this proposed change to the SALT deduction takes things to a new level. If it was hard to imagine restoring the full SALT deduction being any worse, Democrats have managed to prove that lack of imagination to be woefully naive.