Here’s how lawmakers could change key contentious tax rules
Democrats and Republicans looked at the state and local government tax deduction (SALT) and the upcoming budget reconciliation program.
On the one hand, you have lawmakers like Rep. Tom Suozzi (D., NY) who made “No SALT, No Deal” a mantra. In a recent statement, Suozzi (from the very heavily taxed North Coast of Long Island as well as parts of Queens) said, “I will not support any changes to the tax code unless there is a reinstatement of the SALT deduction. “
On board are lawmakers from other parts of the country with high local taxes and high land values. They came together in a SALT caucus which has 32 members.
Then there are large swathes of the country that would see minimal benefits from a SALT restoration, and lawmakers – Democrats and Republicans – representing those areas are agnostic or hostile to bringing back the full deduction.
The SALT deduction allows individual taxpayers who itemize their personal deductions to deduct their aggregate state and local taxes on their annual tax return. In 2017, Republicans passed the Tax Cuts and Job Act, which capped this deduction at $ 10,000. This was seen by Democrats as a punitive measure to harm the Blue States, many of which have the highest local tax rates in the United States.
There is also study after study after study that finds that the benefits of a SALT restoration go almost exclusively to the wealthy. According to the Tax Policy Center, a complete repeal of the SALT cap would lead to nearly 70% of benefits for people with annual incomes above $ 500,000.
“It’s just mind-blowing that they even talk about this type of tax policy,” Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget, told Yahoo Finance (video above). It is “not a tax reform, it is a tax distortion”, he added.
But the laws of politics suggest that negotiators will try to find something in between. A recent statement from leading House Democrats on the issue – including Suozzi – said they were “committed to enacting legislation that will include significant SALT relief” in the bill, including by not calling for a full restoration of the cap.
Rejigger SALT, rather than just going back to what it was before – allow unlimited tax deduction – is more complicated than it seems.
Here are some of the options for what a compromise or “SEL relief” might look like.
“There are ways to restructure SALT”
The state and local tax deduction provides taxpayers with relief from their federal tax bill if they face a heavy local tax burden. The wealthiest coastal states – like New York, New Jersey, Massachusetts, and California – have the highest tax burdens and the wealthiest Americans who have historically benefited from the deduction.
Representative Alexandria Ocasio-Cortez (D., NY), a rare New York lawmaker who doesn’t necessarily agree with the SALT restoration, noted “[t]here are ways to restructure SALT deductions to relieve middle class families ”.
It might be possible, says Goldwein, but it’s tricky. “You could do something totally different, like take the SALT deduction and replace it with SALT credits,” he says, but the bottom line is “within the bounds of the current SALT deduction… there is no structure. that would benefit the middle class. “
Goldwein’s group analysis found that a complete repeal of the SALT cap would provide an average benefit of only about $ 15 for a household in the middle of the income spectrum.
Goldwein described other possible ways to restructure the program, ranging from moving the SALT deduction from itemized deductions to an above-the-line deduction instead, or replacing the SALT cap with some other type of tax cap.
Either way, a restructuring can answer questions about the regressive nature of the tax, but then it could pose a political problem. “I don’t think that would solve the problem that people in New Jersey are really worried about,” Goldwein said.
Congressional leaders pushing for the repeal are also more likely to argue that the structure of the deduction should remain the same, saying it makes it easier for governments at the local level to tax the rich and provide government services with money.
Henry Connelly, spokesperson for President Nancy Pelosi, said in a recent statement that the 2017 SALT deduction cap was a “Republican system of double taxation of blue and non-red communities in order to stifle income that progressive states high cost and cities must maintain services and meet the needs of their residents.
Suozzi and her fellow SALT advocates have also held press conferences with groups like teachers’ unions and mayors to claim that the loss of local income is hurting them.
Plans to increase SALT cap
There are other ideas that would provide a version of SALT somewhere between how it worked before 2018 and today.
One option that would be considered by lawmakers would eliminate the limit on the deduction, but only for those earning $ 400,000 or less per year. A second option would be to increase the cap – currently set at $ 10,000 per year – to a higher level, but without removing it entirely.
Either approach is likely to meet with opposition, with analysis showing that they would always be very regressive.
And on top of that, there’s the difficult math of how any version of a SALT restore would fit into the largest multi-billion dollar program set.
A full repeal of the SALT cap is expected to cost around $ 85 billion a year, or roughly $ 350 billion in total before the cap expires in 2026 anyway. Democrats do not have a SALT restoration measure in the pipeline. reconciliation package underway, but leaders have promised to add it.
This additional cost will likely result in the need to significantly reduce the overall $ 3.5 trillion envelope to meet the objections of moderate Democrats like West Virginia Sen. Joe Manchin and Arizona’s Krysten Sinema.
Goldwein says he hopes the SALT reform will stop or be scaled back “as they sweeten things up, trying to go from that $ 3.5 trillion to $ 1.5 or $ 2.5 trillion” .
Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.
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