- State And Local Tax Deduction Limit Repeal As COVID Relief
- 'Textbook' Relief
- Balance of Payments
- The SALT tax deduction is a handout to the rich. It should be eliminated not expanded
- 1. Lifting the SALT capwould be massive tax cut for rich
- 2. Lifting the SALT capmuch morepro-rich than Trump’s tax bill
- 3. Even with the cap, the SALT deductionis most valuable to affluent
- State and local tax deduction cap back in play for coronavirus relief package
- ‘Odds would be much higher’
- Tough start for bipartisanship
State And Local Tax Deduction Limit Repeal As COVID Relief
United States Flag Capitol State Building during Covid19 2020 novel coronavirus Pandemic, 3d virus … [+] medical model, Washington DC, USA
In the latest episode of the long-running soap opera over the state and local tax deduction, the New Jersey delegation to the House framed removing the current deduction limit of $10,000 as COVID relief in a letter to House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Charles E. Schumer, D-N.Y.
The letter recited most of the usual arguments supporting repeal of the SALT deduction limit, so let’s take a look at the points it makes and consider whether they’re worth their . . . salt.
The New Jersey representatives started out strong: The SALT deduction has “historically strengthened state and local government functions.” That seems to have been its original purpose, and it clearly was the reason Congress gave in on preserving it in the 1980s, when President Reagan planned to eliminate the deduction.
That purpose is a liability for the SALT-deduction-as-pandemic-relief argument, however, because making it politically easier for state and local governments to raise taxes should be low on the list of Congress’s fiscal priorities in responding to the economic devastation of the pandemic.
If Congress wants to help relieve the state budgetary shortfalls, a much better, targeted approach is direct aid to state and local governments.
The next assertion the New Jersey representatives make is that the SALT deduction limit is “a textbook method” to direct relief to “communities ravaged by the pandemic.”
It’s unclear which groups of people they mean, because the previous paragraph recounts the layoffs in the state public sector and the SALT deduction limit almost exclusively affects high-income taxpayers.
It’s unly that the SALT deduction limit would be a financial help to many of the public sector employees who were laid off, and directing economic stimulus efforts to high-income taxpayers in high-tax jurisdictions is quite far from “textbook” stimulus.
Congress has other means to target economic relief to taxpayers with lower wages whose jobs were lost or threatened by the economic fallout from the pandemic and to taxpayers who are the most ly to spend any additional money immediately.
The animating principle of the proposal to remove the SALT deduction limit as part of the COVID relief plan is therefore much more general than targeting the hardest-hit groups of people. It’s that any plan that directs more dollars to New Jersey, New York, Massachusetts, and California — the states identified in the letter as among the hardest hit of the pandemic — counts as relief.
American President with a face mask against CoV infection. 100 dollar banknote. Coronavirus in … [+] United States. Concept quarantine and recession. Global economy hit by corona virus outbreak and pandemic
In New Jersey, only 4.3% of tax returns filed by state residents claimed the SALT deduction in 2018. That’s a smaller percentage of claimants than in Florida, where 5.1% of returns claim the deduction, even though Florida has no state income tax.
But New Jersey’s share of the total amount of SALT deduction claimed nationwide is 5% compared with Florida’s 4.2%. New York’s congressional representatives frequently lambaste the SALT deduction cap, but only 6.9% of their state’s residents claim it. However, New York’s share of the total SALT deduction amount claimed is 9.1%.
Balance of Payments
The New Jersey delegation repeated a favorite point of SALT deduction proponents that “New Jersey ranks among the lowest states for balance of payments in federal dollars — that is, money sent to the Treasury General Fund versus money received.”
This tit-for-tax analysis is an interesting way of looking at federal taxation from the state vantage point, and one that must be acknowledged by its proponents as not exactly in keeping with the idea that “Taxes are what we pay for civilized society,” as Supreme Court Justice Oliver Wendell Holmes Jr. famously put it.
But most devastatingly for this argument, it is a highly imprecise interpretation of the economic concept of balance of payments, which is applied on an international scale and is a measure of all the transactions among the people, companies, and governments in one nation compared with the transactions of those of another nation or nations.
Looking narrowly, as New Jersey’s delegates want to, at only the amount of taxes that New Jerseyans pay to the federal government and the dollars New Jersey receives in direct federal spending is capturing one small part of the actual balance of payments.
If the congressional delegation wants to grasp the total picture of how New Jersey benefits from its relationship with the entire country, it should cast a much wider net and include all the other transactions between New Jersey and the rest of the United States.
Even if the goal is to look at the relationship solely between New Jersey and the federal government, the federal-tax-dollars-in to federal-funds-out number isn’t even a rough approximation of that relationship, because it excludes the value of other functions the federal government performs, the protection New Jersey enjoys from the armed forces, the stable currency insured by the Treasury, the tax system administered by the IRS, the treaty network established and maintained by the State Department, the markets overseen by the SEC, the safe food and pharmaceutical supply monitored by the Food and Drug Administration, etc. New Jerseyans probably consider those functions important, but they’re not captured in the taxes-to-spending analysis.
Welcome to New Jersey state concept on road sign
It’s worth noting that the report the New Jersey delegation cites found that the resident individuals and corporations of only eight states paid more in 2019 in taxes than was distributed to their state in federal funds. Utah was one of them.
The states with the negative balance of payments under this conception fluctuate fairly dramatically, too; in 2015 Texas was among the 10 states with the biggest negative balance, but by 2019, it was in the 20 with the highest positive balances.
The state that appears consistently at the top of the balance of payments list is Virginia, presumably because it has a high concentration of federal government employees and contractors attributable to its proximity to Washington, D.C.
Data from the Rockefeller Institute shows that between 2015 and 2019, the tax receipts from Virginia stayed more or less the same at around $89 trillion, but that expenditures going into the state increased from nearly $140 trillion to just under $202 trillion.
The biggest problem with the balance of payments argument — and the entire push to remove the SALT deduction limit — is that it's contrary to a progressive income tax system. The central principle of such a system is that taxpayers with a greater ability to pay, pay more.
New Jerseyans pay more in federal income taxes on average than Mississippians because on average they earn more. The median household income in New Jersey is $85,751 (only Massachusetts and Maryland have higher medians, and they’re within around $1,000 of New Jersey’s). It’s $45,792 in Mississippi.
Removing the SALT deduction cap would erode the progressivity of the tax code, because it would mean a reduction in the taxes paid by those who have the greatest ability to pay.
Further, the SALT deduction privileges homeowners over renters, because even though renters almost always effectively pay the property taxes in their amount of rent, they are unable to claim property taxes under the SALT deduction.
But even homeownership doesn’t mean a taxpayer is hurt by a $10,000 SALT deduction limit; the owners of more expensive homes are more ly to hit the SALT deduction limit than the owners of less expensive homes.
The best argument for New Jersey and the other localities rankled by the SALT deduction limit is that Congress intended the deduction to financially support the states by not taxing the part of taxpayers’ incomes that they pay in state income and property taxes. The state can argue that that’s a good policy decision at the federal level.
Perhaps the reason that argument is rarely used for uncapping the deduction is that it concedes that the deduction is simply a policy decision and a gesture of legislative grace susceptible to being changed or revoked at any time, rather than an obligation of Congress to preserve.
The SALT tax deduction is a handout to the rich. It should be eliminated not expanded
The politics of tax policy can be as hard to understand as the tax system itself. The latest case in point is the current push from Democrats to lift the cap on the federal tax deduction for state and local taxes (SALT)—which would be a massive tax cut for the rich.
Before the 2017 Tax Cuts and Jobs Act (TCJA), taxes paid to state and local governments could be deducted against Federal income taxes. But the TCJA capped this benefit at $10,000 a year, hitting the wallets of high earners living in high-tax cities and states.
Senate Minority leader Chuck Schumer of New York said of the cap: “I want to tell you this: If I become majority leader, one of the first things I will do is we will eliminate it forever….
It will be dead, gone and buried.” House Majority leader Nancy Pelosi of San Francisco has attempted to remove the cap as part of the Congressional packages to blunt the impact of the pandemic.
Presidential hopeful Joe Biden is also in favor.
Schumer and others argue that lifting the cap will help cushion the impact of the pandemic. As he stated: “The SALT cap hurts people affected by the virus.” But this is unly, since it is the most affluent who are hit by the cap—and they are not, in general, in the front lines when it comes to COVID-19. In fact, the richest neighborhoods of New York emptied out as the pandemic hit.
In the Upper East Side, the West Village, SoHo, and Brooklyn Heights, for example, the residential population decreased by 40 percent or more by May 1. This is a tax cut for people with secure jobs and excellent health insurance, working from expensive homes.
Rather than reversing the cap, there is a strong case for building on the progress made in the TCJA and eliminating the deduction altogether.
Here we present data, drawn from work by our colleagues at the Tax Policy Center, to show that:
- Lifting the cap on the SALT deduction would massively favor the rich, with most of the benefit going to the top one percent
- Lifting the cap would in fact give almost three times as much, as a share of the cut, to the top one percent as the TCJA cuts did as a whole (of course the absolute amount is very much less)
- Even with the cap, the SALT deduction remains pro-rich, with around three-quarters of the benefit going to families in the top fifth of the income distribution
1. Lifting the SALT cap would be massive tax cut for rich
Who would benefit from removing the cap on the SALT deduction? The rich – especially the very rich.
Almost all (96 percent) of the benefits of SALT cap repeal would go to the top quintile (giving an average tax cut of $2,640); 57 percent would benefit the top one percent (a cut of $33,100); and 25 percent would benefit the top 0.
1 percent (for an average tax cut of nearly $145,000). The remaining four percent of the benefit of removing the cap would go the middle class (i.e. middle 60 percent), for an average annual tax cut of a little less than $27.
2. Lifting the SALT cap much more pro-rich than Trump’s tax bill
It is useful to compare the distributional impact of SALT cap repeal to other tax policies or packages. One obvious point of comparison is the TCJA package as a whole, which skewed strongly towards the rich. Sen. Schumer described it as “a cynical one-two gut punch to the middle class.
” Certainly, it was a pro-rich bill overall. Most of the benefits of the TCJA went to the top fifth, and 20 percent went to the top 1 percent. But lifting the SALT cap would be much more favorable to the rich—with almost three times as much of the benefit going to the top one percent (57% vs.
How the benefit of a particular tax change is shared across the distribution gives a good sense of how the pie is divided but is silent on the size of the pie itself. An alternative is to consider changes in actual income levels—and so below we show percent change in after-tax income as a result of the TCJA and of lifting the SALT cap:
The after-tax income of the top one percent rose by almost 3.5 percent as a result of the TCJA; for the rest of the top quintile, it meant a 2.5 percent increase. The middle class saw a smaller income boost, with increases of 1.2 percent, 1.6 percent, and 1.9 percent for the second, third, and fourth quintiles, respectively.
But lifting the SALT cap would give essentially no benefit to the middle class. The second and third quintiles would see no change in after-tax income, on average. The fourth quintile would see a miniscule 0.
1 percent change in after-tax income. Even the 80th to 99th percentiles would not get much—a 0.4 percent increase in after-tax income. The top one percent, in contrast, would see a 1.
9 percent increase in after-tax income.
It is worth emphasizing that lifting the SALT cap is just one tax change, while TCJA changed myriad elements of the tax code.
It is therefore striking that the value of repealing the cap would deliver more than half as big an income boost to the top one percent as the TCJA did in its entirety.
Given a renewed focus on racial inequalities, it is also worth pointing out that families at the top of the income distribution are disproportionately white, both for the top fifth and especially the top one percent—which is 90 percent white.
3. Even with the cap, the SALT deduction is most valuable to affluent
As we have shown, the introduction of the cap on the SALT deduction significantly reduced its value to the richest families; its repeal would therefore be very favorable to the richest Americans.
But even with the cap in place, the deduction still largely benefits families towards the top of the distribution.
Around three-quarters of the benefit goes to families in the top fifth of the income distribution; 26 percent to the 95th-99th percentile; and over 12 percent to the top one percent:
By capping the benefit, the TCJA reduced the huge sums that the very rich could claim—hence the drop in the share of the benefit now going to the top one percent.
But by definition, most of the value of a deduction on income taxes will go to those paying most of those taxes, i.e. higher earners. There is in fact a strong case for eliminating the deduction.
(As our colleague Bill Gale has shown, a similar case can be made for the mortgage interest deduction).
The main argument from some on the political left for the SALT deduction is that it encourages states to spend more by making it easier for them to tax more. Rep. Mike Thompson (D-Calif.
), the chairman of the House Ways and Means Committee’s tax-policy subcommittee, argues that it “protects state and local governments’ ability to raise revenue to fund these [public] services.” It is important to note that government spending does tend to be broadly redistributive, as scholars Edward Kleinbard have argued.
This is a useful reminder not only to examine specific tax policies, but the overall package of raising revenue and providing public services.
But if the goal is for the federal government to provide additional support to state and local governments, far better to do so directly, rather than by the roundabout route of offering a tax break to the rich. As Josh Bivens at the Economic Policy Institute writes:
“The SALT deduction is one tool for redistributing tax revenue, but most working people don’t have access to it, because they don’t itemize their tax deductions to be able to qualify for it.
We should transfer federal aid directly to states to allow them to use the money on targeted healthcare, infrastructure, and education spending, which would more progressively distribute the money and allow states to be more responsive to recessions.”
At best, the SALT deduction is a warped way to do social policy; at worst it is a politically-motivated handout to the richest people in the richest places. Either way, it is bad policy—especially at a time of rising inequality. Rather than seeking to remove the cap on the deduction, policymakers would do better to consider steps towards the removal of the deduction itself.
State and local tax deduction cap back in play for coronavirus relief package
New Jersey Rep. Josh Gottheimer says budget reconciliation may be necessary to get a repeal of the cap on state and local tax deductions through.
(Caroline Brehman/CQ Roll Call file photo)Posted January 27, 2021 at 6:55pm
New Jersey’s House delegation upped the ante for a pandemic relief package Wednesday, calling on congressional leaders to include a repeal of a cap on state and local tax deductions.
The bipartisan push for relief from the so-called SALT deduction cap could add a new wrinkle to negotiations over President Joe Biden’s $1.9 trillion coronavirus relief plan. It also threatens to push the price tag north of $2 trillion, depending on how long the tax break would last.
“Removing the SALT cap would be a textbook method to provide relief to communities ravaged by the pandemic,” New Jersey’s 10-member bipartisan delegation wrote Wednesday to Speaker Nancy Pelosi and Senate Majority Leader Charles E. Schumer and to Treasury Secretary Janet Yellen.
Lawmakers from high-tax states such as New Jersey have sought for years to lift a $10,000 cap on federal deductions for state and local taxes. The cap was imposed in 2017 under a Republican-designed tax code overhaul.
Pelosi and Schumer, as well as House Ways and Means Chairman Richard E. Neal, D-Mass., whose constituents would also benefit, have been vocal backers of removing the deduction limit.
They included a two-year suspension in last May’s House-passed coronavirus relief bill, estimated to cost $137 billion at the time. They later included a $66 billion, one-year suspension in a scaled-back version that passed in October.
Under current law, the cap would expire at the end of 2025. The cost of repealing it through that date, as the New Jersey delegation wants, would be $461 billion, according to the Tax Foundation’s Garrett Watson.
A bipartisan group of lawmakers is negotiating with the Biden administration on the coronavirus rescue plan. But Democratic leaders’ patience is wearing thin, and they are preparing to start the budget reconciliation process, which can bypass a Senate filibuster, next week.
‘Odds would be much higher’
Reconciliation requires strict budget targets to be met, however. For example, if Democrats decide to cap the overall price tag at $1.9 trillion, they would need to offset SALT relief with spending cuts or tax increases elsewhere in the package.
Rep. Josh Gottheimer, D-N.J., is a leader of the bipartisan Problem Solvers Caucus who’s been involved in the talks. He told CQ Roll Call on Wednesday that “the odds would be much higher” of getting SALT relief if party leaders go through with reconciliation in order to pass the measure with a simple majority.
Nevertheless, Gottheimer said, “I’ve been working very hard to try to get COVID [relief] done in a bipartisan, regular approach.”
Aside from GOP lawmakers from affected states — the two New Jersey Republicans left in the House, Christopher H. Smith and ex-Democrat Jeff Van Drew — Republicans have generally opposed lifting the SALT cap as a costly sop to rich people in Democratic-leaning, high-tax states.
The Joint Committee on Taxation has estimated that in 2017, the last year before the cap was imposed, 93 percent of the SALT benefit accrued to households earning at least six-figure incomes. Moreover, the benefits of an uncapped SALT break are distributed unevenly across the country, flowing disproportionately to states and districts with higher state and local tax burdens.
The Congressional Research Service reviewed IRS data for 2017 and found that the House districts with the 20 highest average SALT deductions were in states with above-average effective tax rates, including New York, New Jersey, California and Connecticut.
Those states also happen to be Democratic-leaning, while districts in lower-taxed states Florida, Texas, Tennessee and Alabama — which have leaned GOP in recent years — tended to get less of a benefit. That’s one reason why Republicans have labeled SALT cap repeal efforts a “blue-state bailout” for rich people in those states.
“We should be trying to help people who truly need it to make it through this very troubled time,” House Ways and Means member Tom Rice, R-S.C., told CQ Roll Call last year when Democrats began their push to repeal the SALT cap as part of virus aid legislation. “It’s so disappointing and harmful that they would use this crisis to push their agenda and help the top 1 percent.”
Critics of the cap argue that it hits states the hardest where the suffering from pandemic-induced revenue loss has been the greatest. Balanced-budget requirements dictate that states cut spending when revenue declines, and the SALT cap keeps a lid on state and local governments’ ability to raise taxes to pay for critical services.
For example, New Jersey has been forced to cut its government workforce by nearly 5 percent during the 12-month period ending in November, according to the delegation letter to leaders Wednesday.
Biden has also sought $350 billion in direct aid to states and localities as part of his relief proposal. But that’s been a long-standing sticking point with GOP leaders and far in excess of what the bipartisan group including Gottheimer was able to agree on late last year, before ultimately being jettisoned.
Tough start for bipartisanship
And by even talking about using budget reconciliation, Democrats risk alienating the Republicans they’d need to get above the usual 60-vote barrier.
Alaska Sen. Lisa Murkowski, a GOP moderate whose support could be critical to any bipartisan compromise, questioned why Biden included in his plan a provision to more than double the federal minimum wage to $15 an hour.
“Does he really think it should be part of this COVID package? Because if [Biden] really does, I’d to have a conversation with him,” Murkowski told reporters Wednesday. “I don’t think that that’s the best way to start things off this year.”
West Virginia Sen. Joe Manchin III, a centrist Democrat who sometimes sides with Republicans, said congressional leaders should try to reach a bipartisan compromise before resorting to reconciliation. But he didn’t rule out backing the procedural maneuver if it becomes necessary.
“Let’s do that first — show them that we can start out the new Congress bipartisan and what we don’t agree on in a bipartisan way,” Manchin said. “Then Sen. Schumer and the leadership and the Democrat Party has other means to move things along, and I think it’s appropriate.”
The price tag of the aid package has been a concern for Manchin, however, and party leaders would need his vote in the 50-50 Senate.
It’s not clear that boosting the dollar amount by including SALT relief — which doesn’t benefit his lower-income, more lightly taxed constituents as much as others — or by pushing out other aid provisions to make room for the tax break would get Manchin’s vote.
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