Lawmakers should push against efforts to lift the SALT cap, and they should keep an eye toward bringing additional transparency to the tax system.
Children love playing “hide-and-seek.” As it turns out, lawmakers do too — particularly when it comes to our tax code.
Tax burdens are cleverly hidden in layers and layers of rules. And with taxes at the center of Congress’s attention this year, it is time for such childish games to be left behind.
There is no benefit to hidden tax burdens — except, perhaps, to lawmakers who chose to make it difficult for average people to understand how a piece of legislation is responsible for increasing tax bills. Sometimes, though, transparency shines through.
Such was the case when lawmakers largely did away with the alternative minimum tax (AMT) on individuals in the 2017 Tax Cuts and Jobs Act (TCJA), which expires at the end of this year. The AMT targets higher-income taxpayers with a separate set of calculations, and further places limits on their deductions.
It is a flawed policy for a few reasons. First, it requires taxpayers to calculate their tax liabilities twice in two different ways; taxpayers pay the higher amount of the two methods. The compliance headache isn’t the worst of it, though. The second flaw is that the complexity makes a taxpayer’s true burden more obscure.
Before 2017, roughly 5 million taxpayers had to pay under the AMT. However, changes adopted under the TCJA reduced that number to around 200,000. Other changes removed limits on deductions for higher earners.
This was a huge achievement on its own. But those policies were paired with another change that provided some clarity for taxpayers, just not in a way that they appreciated.
You see, under the AMT, there were no deductions for state and local taxes (SALT), and a variety of other deductions were limited.
As part of the trade for a simpler system, lawmakers adopted a more transparent limit to deductions, including a $10,000 cap on SALT.
For many, the hide-and-seek approach of the AMT changed overnight into a direct limit on their deductions. No longer would most of those taxpayers calculate their taxes twice, but they did face a clear limitation.
Lawmakers made the right choice to make tax rules more transparent for high earners, but the policy choice surrounding SALT has been under direct assault since President Trump first signed the law.
Members of the “SALT Caucus” in Congress — composed largely of House representatives from high-tax states like New York and New Jersey — have targeted the $10,000 limitation. The co-chairs of that caucus have even endorsed full deductibility of state and local taxes. If enacted, this would leave lawmakers with a nearly $1 trillion budget hole relative to keeping the current limit in place.
That price tag would tie lawmakers’ hands and make it harder to provide relief for taxpayers across the board, rather than just those who benefit from a higher SALT cap. But the SALT Caucus also ignores the fact that most taxpayers who would have seen their deductions limited and have no use for SALT deductions under prior law are actually better off with the $10,000 cap and the other TCJA changes.
Some may want a more generous SALT cap alongside the AMT relief designed in 2017, but that’s just the type of request for unprincipled tax relief that would balloon the costs of the legislation.
So, would it be better for Congress to appease the SALT-friendly lawmakers and chart a course back to something like the broader AMT and other deduction limits that existed before 2017?
My answer is “no.” Lawmakers should push against efforts to lift the SALT cap, and they should keep an eye toward bringing additional transparency to the tax system.
The 2017 reforms are set to expire at the end of this year, and lawmakers are actively working to determine how to extend those policies. Baked into that exercise is the reality that some policy changes could increase taxes on some taxpayers while providing relief to others.
Lawmakers may wish for a way to hide any tax increases in obscure new structures, or by reviving flawed designs from the past. But the answer is not to introduce a new game of hide-and-seek. Congress members should make tough decisions and be willing to be held accountable for those decisions, rather than hide tax consequences in the upcoming bill.