When Democrats find a new cause: ‘Helping millionaires’
Late in 2017 Congress passed reforms that lowered income tax rates for virtually all Americans. To help pay for those cuts, lawmakers limited to $10,000 the amount of SALT — state and local taxes — that are deductible on federal returns.
Before the change, full deductibility of SALT hugely benefited affluent households in high-tax states like Illinois who could write them off. Residents of lower-tax states like Indiana, in turn, subsidized through their federal tax burden what wealthier taxpayers here didn’t have to pay.
The federal tax code doesn’t distinguish by political party. But the change had its biggest impact on mostly Democratic-run states with high taxes and high spending. That’s why repealing SALT is supported by members of Congress from California, New Jersey, New York and Illinois and not by members of Congress from frugally run states tired of propping up the big spenders.
The effort to kill the $10,000 deductibility cap has been ongoing since it was implemented. Democrats are more confident now it will happen. They frame it as a tax break for the “middle class.” But a more accurate description of lifting the cap is a wry CNBC headline from 2018: “Blue-state Democrats have a new cause: Helping millionaires.”
The nonpartisan Tax Policy Center calculates that killing the deduction cap would mostly help affluent Americans — with 57% of the benefit going to the wealthiest 1% of U.S. households.
To the extent that the deduction cap was a Republican squeeze of Democratic states, it failed. The Wall Street Journal reports that, “Although the cap disproportionately affects residents of high-tax states, it didn’t cause widespread federal tax increases there. In fact, in New Jersey, New York and California, most households are paying less now than they did under the old tax system. That is because the cap’s effect is countered by other new features, including lower (federal income tax) rates, a larger child tax credit, a bigger standard deduction and changes to the alternative minimum tax.”
Even the left-leaning Brookings Institution says removing the cap would be “a massive tax cut for the rich” and “a tax cut for people with secure jobs and excellent health insurance, working from expensive homes.” So it’s especially galling that Democrats now are trying to wedge a repeal of the cap into, yes, a COVID relief bill for Americans crushed by the contagion.
Illinois’ congressional Democrats, most notably U.S. Sens. Dick Durbin and Tammy Duckworth and the North Shore’s Rep. Brad Schneider, are leaders in this campaign, which would make the tax code more regressive. A handful of blue-state Republicans also have signed on, although most Republicans understand the potentially unfair consequence here: The easiest way to give a tax break to well-off households is to restore the old higher income tax rates on all Americans.
This effort to kill the deduction cap panders to squeaky-wheel taxpayers in U.S. neighborhoods with the highest property taxes. For Democrats who routinely say they want to raise taxes on the wealthy, support for restoring SALT deductibility is a clumsy dance. As if to say, “We want to soak highincome Americans — but not the ones we represent.”
The only upside, if you could call it that, is finally, Democrats in high-tax states are acknowledging tax flight, as we’ve been writing about for years in our series Illinois Exodus. They see that high taxes are driving wealthy people out of their states and they want to keep them, thus the push to lift the cap. Most Americans aren’t even affected by the 10,000 cap because they don’t pay that much. But the well-off do.
The understandable uproar about Illinois taxes is one reason why, in 2019, Gov. J.B. Pritzker promised property tax reforms. But he didn’t push his fellow Democrats in Springfield to deliver solutions after a task force fell apart. So they didn’t.
If Pritzker can help congressional Democrats actually want to reduce the tax load on all Americans, they should, of course, reduce spending. But that never seems to be on the table.
We wonder what will happen when the newly energized progressive wing of the Democratic Party in Illinois and nationwide discovers that full restoration of deductibility would pour tax breaks worth more than $65 billion a year into Kenilworth, Hinsdale, Gold Coast Chicago and other affluent communities across the U.S.
The simpler way for Democrats to make peace with wealthy taxpayers is to — are you ready for some crazy talk? — work on budgets that reduce taxes. Line-by-line cost vetting. Cutting spending. Fair labor contracts that don’t exceed the cost of living. Cuts to personnel wherever possible. Pension reform. Less borrowing.
Remember, this arcane deductibility debate isn’t much of an issue in fiscally frugal states with residents shouldering a reasonable tax burden. Those frugal states should not have to subsidize state and local spending here.
And if the Democrats and their progressive wing truly care are about fairness and equity, they should not be advocating to remove the cap. They should be diligent about spending less.