Most of its benefits go to very wealthy taxpayers.
Most of its benefits go to very wealthy taxpayers.
H ouse Republicans have one of the thinnest majorities in congressional history, and easily the skinniest in living memory. As a result, it’s a challenge to pass anything off the House floor, as GOP leadership nose-counters can only lose about four congressional Republicans on any vote, assuming the Democrats all vote no. This presents a lot of problems in every policy area, but it’s a keen one in tax policy. Here, there is a strong group of mostly northeastern Republicans who have indicated that they demand “SALT cap” relief as a condition of doing other tax work in the chamber.
The “SALT” in “SALT cap” stands for the “state and local tax (deduction).” The state and local taxes here are either state income tax or state sales tax paid (it’s up to the taxpayer), real property taxes on personal and vacation properties, and personal property taxes that localities might impose on cars and boats.
Under current law, the 91 percent of households who choose to use the standard deduction do not have a SALT deduction (the standard deduction is meant to account for it and other items such as mortgage interest and charitable contributions). The other 9 percent of families choose to itemize their deductions, since the sum of these write-offs is bigger than the standard deduction (think families with relatively new mortgages with interest). If you’re in this latter category, you have a SALT deduction, limited to $10,000.
The objection of the House Republicans animated over the SALT deduction is that this $10,000 figure is too small to account for the income taxes and property taxes incurred by middle-class and mass-affluent taxpayers from their districts. On the surface, this seems like a legitimate complaint. Property taxes in states such as New Jersey and New York are famously sky-high, and their income taxes aren’t modest. Most middle-class taxpayers from these states have SALT totals well in excess of $10,000, especially if they are married.
But this claim is isolated from the tax situations these same households face. Prior to the Tax Cuts and Jobs Act (TCJA) that limited the SALT deduction to $10,000, these families had a theoretically unlimited SALT deduction. But most of these same families with more than $10,000 of SALT to claim fell into the old Alternative Minimum Tax (AMT), which zeroed out their SALT deduction entirely. Most taxpayers at the time were unaware that their actual SALT deduction was $0, and that TCJA raised their effective claim from $0 to $10,000. They never had a SALT deduction before TCJA. The AMT wiped out SALT deductions for 5 million six-figure families who were too high-income to be considered working class and too low-income to be considered rich.
On the high end of the spectrum, itemized deductions before TCJA used to phase out in a process known as “the Pease limitation.” In today’s dollars, itemized deductions started to phase out for married couples with an income of $390,000 ($358,000 for single parents and $325,000 for everyone else). This phaseout effected the theoretically unlimited SALT deduction. For every $100,000 by which your income exceeded the Pease threshold, your family lost $3,000 of itemized deductions.
Add in that perspective, and the pre-TCJA experience of the SALT deduction in the northeast takes on a whole new flavor. The majority of families didn’t itemize their deductions at all, opting for the standard deduction. Those who did itemize saw their SALT deduction lessened or eliminated due to the rock of the AMT on the one hand and the hard place of Pease on the other. Rare was the family with a truly unlimited SALT deduction.
Since TCJA, states have put into place SALT-cap “work-arounds,” mostly for owners of partnerships and S-corporations. These work-arounds vary in detail, but they generally allow for state taxes on business profits to be paid at the entity, rather than the owner, level. Doing so allows business owners to claim a business deduction for SALT payments even if they have topped out their personal SALT deduction. Some states have even explored a payroll-tax or state-tax-credit type system to allow anyone to opt for SALT deduction. The Treasury Department of Presidents Donald Trump and Joe Biden have looked the other way as states stand up these SALT-cap-avoidance mechanisms.
The bottom line is that, today, the overwhelming majority of taxpayers in the SALT GOP districts have lower taxes than they did before TCJA. The standard deduction has doubled, creating a “zero bracket” of nearly $30,000 for married couples. The child tax credit has been doubled to $2000. The middle-class tax brackets which used to be 15, 25, and 28 percent are now 12, 22, and 24 percent. There is no more AMT, and there is no more Pease. And those are just the major tax benefits. It is famously difficult to convince people that their taxes have gone down relative to prior law, but they most certainly have gone down.
So why not just uncap SALT or, at least, raise the SALT cap above $10,000? The fact is that most taxpayers would not use it (those in standard-deduction America), and most of the benefit goes to very wealthy taxpayers. According to the center-left Committee for a Responsible Federal Budget, uncapping SALT would deliver 81 percent of benefits to the top 5 percent of earners. What if we limited the uncapping to households making less than $400,000 per year? In that case, 40 percent of the benefits would still go to these rich taxpayers. Those making $100,000 or less would get no benefit whatsoever, since they are and would remain standard-deduction families.
I’d ask these SALT Republicans: Is that your intent? Do you want to cut taxes in such a way that no benefits accrue to five-figure families in your district and most of the benefits go to ultra-rich families who can use SALT work-arounds and who increasingly vote for Democrats? Do you plan on repealing the SALT-cap work-arounds that these high-income families are currently using? Do you plan on bringing back the AMT and/or Pease? Because if the answer to any of these is “no,” you’re trying to have it both ways. You’re not restoring a pre-TCJA status quo — you’re creating a far more generous SALT deduction than the one that you think you remember.