One of the surprising obstacles to President Joe Biden's infrastructure and tax legislation is that a contingent of Democrats in Congress — particularly lawmakers from New York — want the deal to restore a tax provision sharply curtailed by the GOP in 2017 that is, for the most part, a huge tax cut for wealthy households.
On Wednesday, Vox broke down the debate over the future of the state and local tax (SALT) deduction — which Senate Majority Leader Chuck Schumer (D-NY), House Speaker Nancy Pelosi (D-CA), and a number of Democrats from New York and other high-cost states insist is critical.
"For decades, taxpayers who itemized their federal income taxes could deduct what they paid in state and local property taxes and either income or sales taxes (whichever was higher). It was one of the biggest federal tax expenditures, according to the Tax Policy Center," reported Emily Stewart. "But with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017 under then-President Donald Trump, that changed: the law capped the state and local deduction at $10,000."
The net result is that some households in states with high taxes suddenly had to pay a lot more — something that political observers noted was a direct attempt to punish Democratic-run states that tend to tax the rich more.
"While the burden of the SALT cap falls disproportionately on high-income taxpayers in those states, it can affect other people too. In a state like New Jersey, people's property taxes can be high even though they're not super rich. And in New York City, $150,000 in annual income isn't landing you in a Fifth Avenue penthouse," said the report. Some state officials also say SALT helps keep progressive taxes from driving wealthy people out of states — although there's scant evidence for this — and argue it prevents a "race to the bottom" of tax cuts that defunds public services.
But Democrats are torn on whether bringing back the full deduction is smart policy.
"According to estimates from the Center on Budget and Policy Priorities, if the SALT cap — which is set to expire in 2025 — were to be repealed earlier, it would overwhelmingly benefit those at the higher end of the income scale — the ones who were hurt by the bill back in 2017," said the report. "The CBPP estimates that more than half of the benefit would go to the top 1 percent, and over 80 percent would go to the top 5 percent, of earners." There is also some evidence that SALT incentivizes wealthy communities to block affordable housing, since if housing shortages inflate property values, residents can simply write off the property tax increases.
"The debate over what to do about the SALT deduction doesn't have to be a binary one," noted the report. "There are other alternatives, like reducing all itemized deductions or limiting the tax rate applying to itemized deductions. Or, the federal government could raise the SALT cap to $20,000 for couples to at least get rid of the marriage penalty currently in place, or raise the top individual income rate back to 39.6 percent."
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