As Democrats struggle to find new revenue sources to pay for $3.5 trillion in spending, one would think that restoring a large tax deduction for the wealthiest Americans would be the furthest thing from their minds. Unfortunately, Democrats have been conducting a campaign to convince voters that the State and Local Tax (SALT) deduction is actually crucial for middle-class workers, as opposed to the wealthier Americans that are its main beneficiaries.
The 2017 Tax Cuts and Jobs Act capped the value of the SALT deduction at $10,000. The bill contained dozens of changes to the individual tax system, which pushed more taxpayers towards taking the nearly-doubled standard deduction and simplifying the code’s structure. Now, some Democrats from high-tax states are pushing to restore the full value of the deduction.
NTU got into more depth on the SALT deduction recently in one iteration of its "What’s the Deal With...?" series, but let’s briefly dispel some of the myths Democrats have been pushing.
“SALT is about the middle class”
Even factoring in the higher cost of living in states concerned about the capping of the SALT deduction, eliminating the SALT cap would overwhelmingly benefit wealthy taxpayers. Data from the Tax Policy Center shows that about 57 percent of the benefit of eliminating the SALT cap would go to the top 1 percent, while 83 percent would go to the top 5 percent. Taxpayers below the top 20 percent would receive just about 4 percent of the total benefit. All told, 99 percent of the benefit of SALT cap repeal would flow to taxpayers with $100,000 or more in annual income.
A distributional analysis isn’t always the most important metric for a tax change, but in this case it is Democrats attempting to dismiss differential impact that they would ordinarily decry as fundamentally unfair. But any argument that SALT has any significant impact on the middle class is simply false.
“SALT protects against double taxation”
Fortunately, no. Double taxation occurs when taxpayers are taxed twice on the same income for the same services. Taxpayers receive different services, such as they are, from their state and local governments than from the federal government. No state offers a deduction for taxes paid at the local level for this reason — it’s a separate tax paid to fund separate government services.
The irony here is that states like New York, from which many of the most vociferous SALT cap opponents hail, do impose actual double taxation through convenience of the employer rules, as NTUF highlighted in a recent issue brief.
“SALT compensates states that pay more in taxes”
Left-wing discourse around the SALT deduction is overflowing with ironies and logical gymnastics, and this argument is no different. Democrats who everywhere else endorse taxing the wealthier at higher rates trip over themselves to find ways to say that progressive taxation is unfair — only when it comes to the SALT deduction.
First of all, states don’t pay federal taxes, per se, residents do. Any discussion of “donor states” in the context of the federal tax code must acknowledge that the measure is simply an aggregation of individual income tax bills and spending programs that benefit individuals in that state, not some bill that is paid by the state government for services rendered by the federal government.
States whose residents pay more in taxes to the federal government do so because they are wealthier. The American system of progressive taxation to fund government programs, many of which like Medicaid benefit poorer citizens, is a reflection of a liberal governing philosophy. To aggressively advance this ideology in all other settings, but decry it because many residents of wealthier states happen to be Democrats, is hypocritical to say the least.
In any case, it’s silly that Democrats take issue with wealthier Americans paying more in taxes only at the state level. If anything, progressive logic should dictate special tax deductions for taxpayers from states that pay less in taxes, not states that pay more.
“SALT prevents wealthy taxpayers from realizing the full impact of the tax burden high-tax states place on them by allowing them to recoup some of the loss through the federal tax code, thereby preventing them from fleeing to states to states that are not determined to milk their wealth for ever-expanding government spending”
Oops. That one’s true.
Below is a list of comments Democrats in Congress have made about the SALT deduction that are directly contradicted by the above debunkings (well, except for the last one), presented in no particular order.
Sen. Bob Menendez (D-NJ): Repeal of the SALT deduction would “get relief right to taxpayers who overwhelmingly are donors to the national good.”
Rep. Jamie Raskin (D-MD): “We've got to have a SALT march, like Gandhi did. Let's have a SALT march in America to restore some common sense to our tax policy.”
Rep. Josh Gottheimer (D-NJ): “The bottom line is when they gutted SALT and capped it at $10,000, it was a direct assault on hardworking men and women of labor.”
Rep. Tom Suozzi (D-NY): “It's a body blow to my entire state. It's an existential issue. People are leaving my state because of the cap on the SALT deduction and it's only been exacerbated by the coronavirus. And when people leave the state because they lost the SALT deduction, then moderate-, low-income [taxpayers] and the rest of us are left behind holding the bag.”
Rep. Richard Neal (D-MA): “The discriminatory Republican tax law capped the SALT deduction that average, hardworking families in many states rely on to afford owning their homes.”
Rep. Josh Gottheimer (D-NJ): “We will only vote for a reconciliation package on the House floor that reinstates SALT. This is about getting more money back into the pockets of Jersey’s middle class families and stopping double taxation that only benefits Moocher states – which is why we are standing firm. No SALT, no dice.”
Rep. Mikie Sherrill (D-NJ): “Teachers. Cops. Single moms. Seniors. Veterans. Middle-class Americans. They are the ones getting double taxed by the SALT cap.”
Rep. Bill Pascrell (D-NY): “Despite Republicans’ lies, SALT is all about the middle class.”
Sen. Chuck Schumer (D-NY): “We need to cushion the blow of this virus. The SALT cap hurts people affected by the virus. It hurts so many of the metropolitan areas like New York."
Former Gov. Andrew Cuomo (D-NY), after imposing $4 billion in tax hikes on New Yorkers: “When [the SALT cap is repealed], there will be a net reduction in taxes.”
Gov. Cuomo: “The federal administration’s SALT policy is an economic civil war that helps red states at the expense of blue states, and we are now seeing the potentially devastating effect of it in the form of significantly lower tax receipts.”
On the other hand…
Sen. Michael Bennet (D-CO): “We can say we are for a progressive tax code and for fighting inequality, or we can support the SALT deduction. But it is really hard to do both.”
Rep. Alexandria Ocasio-Cortez (D-NY): “I think it's just a giveaway to the rich, and I think it's a gift to billionaires."
Sen. Bernie Sanders (I-VT): “I have a problem with extremely wealthy people being able to get the complete [SALT] deduction.”