Taxes: A blue state divide over the SALT deduction
A tax deduction for homeowners is creating a split among Democrats, said Laura Davison and Kaustuv Basu in Bloomberg.com. President Biden announced “a raft of individual tax proposals” last week targeted at the country’s richest families in order to help fund the $1.8 trillion “American Families Plan.” But one Trump-era tax policy Biden did not mention was the $10,000 cap on state and local tax deductions, also known as SALT. Until 2017, Americans were always “able to subtract some portion of what they paid to their state and local governments” from their federal tax bill. The primary beneficiaries, however, were wealthy “residents living in expensive communities” in high-tax states such as New Jersey, New York, and California. The cap is saving the government $88.7 billion in 2021, and it has support from conservatives as well as progressives. But a group of about 20 moderate lawmakers from those high-tax states has threatened to hold up passage of Biden’s plans unless the cap is lifted.
I live in New York, said Rick Newman in Yahoo.com, “and as far as I can tell, I came out about even after the 2017 tax changes.” But it was still wrong for Congress to “upend core parts of the tax code that Americans take into account when making big financial decisions such as buying a home.” Homeowners can’t easily change where they live based on tax whims. Those who can move most easily are wealthy families, and they’re leaving blue states in droves, said Peter Coy in Bloomberg Businessweek. The SALT deduction has been “law since the first federal income tax under President Lincoln,” because it eases the burden on taxpayers in those high-tax states. It’s not perfect, but it does help to reduce tax competition between states and forestall “a destructive race to the bottom.”
The problem here isn’t the cap, said The New York Times in an editorial—it’s the SALT deduction. Yes, a cap may be unfair to high-tax jurisdictions. But the main beneficiaries of a repeal are the wealthy. According to the Tax Policy Center, only a small share of households earning between $100,000 and $200,000 would benefit from an unlimited SALT deduction, and even for those that do, the average benefit would be a paltry $130. By contrast, “almost everyone making more than a million dollars a year would benefit—on average by more than $44,000.” For a big majority of Americans the SALT deduction is irrelevant, capped or not. It just “shifts the distribution of taxation off the shoulders of the wealthy and onto the shoulders of the majority who do not make enough money to itemize tax deductions.”