Democrats are at loggerheads over a progressive Trump-era revision to the tax code. The Tax Cuts and Jobs Act of 2017 slashed taxes for the rich and corporations — with 83 percent of the benefits trickling up to the top 1 percent. However, it also instituted a $10,000 deduction cap on state and local taxes (SALT). Prior to this reform, individuals and households could deduct an unlimited amount in state and local property, sales, and income taxes. Democratic leadership broadly supports maintaining the cap. Meanwhile, a coalition of twenty Democrats and nine Republicans have formed the State and Local Taxes Caucus —threatening the passage of President Biden’s infrastructure and tax priorities if all the proposals exclude a SALT cap repeal.
SALT DEDUCTIONS ARE REGRESSIVE
Representative Josh Gottheimer (D-NJ) – one of the repeal’s staunchest proponents – remarked that reinstating previous SALT deductions would be a boon for “struggling families.”
Yet the deductions disproportionately benefit the wealthy. Under a full repeal, the top 1 percent of households would receive an average tax cut of at least $35,000— compared to a paltry $37 for their middle class counterparts.
This phenomenon is a function of our tax code structure. Most taxpayers opt for the standard deduction when filing their taxes. Only 25 percent of households with an income between $40,000-$50,000 elect to itemize deductions— compared to 90 percent of those with an income exceeding $200,000.
Typically wealth and deduction eligibility are linked. For example, an individual can deduct mortgage interest as an expense, but not rent. One can also deduct some capital gains losses, but not lost wages. Deductions derive their value from the top tax bracket applicable to a taxpayer. For instance, a $1,000 deduction is worth $370 for a household in the 37 percent bracket, but is only worth $220 for those in the 22 percent bracket. Unlike tax credits or public assistance programs, tax deductions are inherently structured in a manner that disproportionately helps the wealthy.
Prior to the $10,000 cap, New Yorkers claimed an average SALT deduction of $23,804. Extrapolating beyond this data point indicates that state and local governments would cede significant revenue to the coffers of the wealthy if the cap is nixed. At a time when states have witnessed their largest revenue declines in at least 25 years, diverting any revenue to the wealthy does not make economic sense.
There is no demonstrable evidence that retaining the SALT cap would electorally hobble Democrats. Only 36 percent of total voters support its repeal. Analyzed by partisan affiliation, this translates to 46 percent of Democrats, 30 percent of independents, and 28 percent of Republicans.
Partisan and disingenuous framing from prominent elected Democrats likely influences the perception of the party’s base. For example, a coterie of Democratic governors (led by Gavin Newsom of California and Phil Murphy of New Jersey) sent a letter to President Biden urging the SALT cap’s repeal. They argued on the premise that Trump’s support for the cap, “…was based on politics, not logic or good government.” Additionally, they claimed that this provision constituted “double taxation.”
A policy can be politically motivated, logical, and emblematic of good government. These concepts are not mutually exclusive.
Yes, the cap mainly targets blue states and was embedded in a tax bill that passed along party lines. However, U.S. District Judge Paul Oetken (appointed by President Obama), ruled that the cap did not coerce cities and states into paying for federal corporate and income tax cuts.
The 400 richest Americans pay a lower tax rate than any other income group. Additionally, 69 percent of voters support raising taxes on the rich and corporations. Given this context, it does not make either policy or political sense to champion tax deductions that overwhelmingly benefit the wealthy.
Furthermore, the notion of “double taxation” regarding the SALT cap is absurd. This assertion presupposes that state and local governments do not uniquely or predominantly offer a host of services like public transportation, public schools, parks and recreation, public works, police, fire, and EMS services.
The claim “double taxation” might operate well in the realm of alternative facts, but not in our reality where there is a distinct separation of powers between different levels of government.
As a party that purports to fight for the working-class, Democrats must unequivocally reject any upward redistribution of wealth.