SALT cap shakes up party roles in ironic federal taxation twist
The Build Back Better Act pushed by the Biden administration and passed by the House last week contains a provision to raise the deduction cap for state and local taxes, or SALT, from $10,000 to $80,000.
This, for me, is peak irony. First, some explanation of the SALT cap.
Before President Donald Trump’s 2017 Tax Cuts and Jobs Act, which is understood correctly as a tremendous tax cut for the wealthy, taxpayers could itemize the state and local taxes they had paid and deduct them from their federal income.
One of the reform’s only tax hikes was a cap on SALT deductions at $10,000. Before the cap, for example, if a taxpayer had paid $30,000 in property and state income taxes, then their federal income would be considered $30,000 lower for tax purposes. Limiting the SALT deduction to $10,000 would effectively mean the taxpayer owed taxes on $20,000 more — the difference between $30,000 and the cap.
At the time, this was widely perceived as a fiendishly clever way to raise revenue while simultaneously owning the libs. The libs in places like California, New York, New Jersey and Connecticut, the thinking went, pay high property taxes, as well as high state and local income taxes. This cap on tax exemptions seemed highly targeted to blue states.
Many people’s taxes — particularly affluent libs who pay a lot of property, and state and local income taxes — went up significantly starting in 2018.
Now that Democrats run the House, Senate and White House, they get to write tax policy in 2021. And while “Build Back Better,” or BBB, is described as a social spending bill, it is primari
ly a tax policy document.
BBB works toward anti-poverty, equality and climate goals largely through tax policy. Spending on climate is mostly through tax breaks for clean energy. Spending to reduce child poverty is through an expansion of the earned income tax credit and the child tax credit. A drive for equality comes through increasing taxes on upper 1 percent earners. It’s a tax law through and through.
Not surprisingly, one of the key priorities for Democratic representatives from California, New York, New Jersey and Connecticut was repealing the SALT cap. It’s not something they shouted from the rooftops. But some of their constituents made it clear this needed to get done. Now that BBB passed the House, Republican representatives are shouting it from the rooftops, and they will continue to do so.
This all matters more — as most tax issues do — to the wealthy.
If the SALT deduction is lifted from $10,000 to $80,000 in the final BBB legislation (all of this is pending a Senate vote), bluestate members of Congress will be happy because every donor who matters to their re-election campaigns will be affected. They will have delivered for their people.
But we can see a few ironies piling up around the SALT cap hike.
The bottom line: Repealing the SALT cap would be a very big benefit to the wealthy. And it will cost $85 billion a year in tax revenue. The top 1 percent of taxpayers will get about half this benefit, while the next 10 percent will enjoy 35 percent of the benefit.
This is all extremely off-brand for the Democratic Party in 2021. It makes an easy attack line for Republicans. Texas Rep. Kevin Brady, the ranking Republican on the House Ways and Means Committee and therefore GOP point person for tax policy, immediately began hammering BBB for the SALT cap benefits to the wealthy.
Now let’s go deeper into the ironies.
Unmentioned in the critiques of the SALT cap boost is how this will affect Texans.
Texas is a high property-taxrate state because of the absence of a state income tax. In Bexar County, residents pay 2.7 percent of market value for their home every year. That means anyone who owns a home worth more than $370,000 has filled their SALT exemption on property taxes alone. With the median home price now above $300,000 in my not-particularly wealthy county, the SALT cap hits a lot of people — just as it hits a lot of higher earners across the state.
All of this is to say that every Texas donor of means to Brady is also massively affected by the SALT cap. They are, in that sense, hoisted with their own petard. You just won’t hear Brady talking about it.
The SALT cap jockeying lays bare an uncomfortable fact of democracy. Namely, there’s a wide gulf between the “voter class” and the “donor class.” Lower-income people, even in blue states, are not much affected by SALT caps. Higher-income people and people who own valuable property, even in red states, are very affected by SALT.
For my part, my valuable house and my hefty 2.7 percent property tax rate mean I’m very affected. Even though the SALT cap hike is, in that sense, “fair” to me, I still think House Democrats should not give me this tax break in the BBB.
Even if you revel in the “owning the libs” aspect of the SALT cap, there are still more nuances you should consider — namely, federalism.
In the abstract, Republicans profess to believe more strongly in devolving power to states, as opposed to Democrats, who often seek to strengthen the central government at the expense of “states’ rights.”
State and local taxation, however, is a key way in which residents of a state exercise choice, engaging in the “50 laboratories of democracy” aspect of our federal system. When residents of a state democratically choose higher taxes in order to, for example, improve health care access, that’s a valid choice.
In the broadest sense, the SALT deduction shifts spending and taxation power down to the state level. This again puts Democrats and Republicans in this SALT fight on the opposite side of where they usually land.
It’s just another ironic twist in the upside-down roles of SALT caps.
What happens next?
A couple of senators — Bernie Sanders, I-Vt., and Robert Menendez, D-N.J. — do not like the wealthy skew of the House SALT cap increase and have plans to limit the benefits to those making less than $400,000 per year.