Lifting the cap on this federal tax break would be a big break for California’s rich
Democrats are pushing hard to do away with the $10,000 limit on how much in state and local taxes Americans can deduct on their federal tax returns — a big deal in high-tax states such as California and New York, where the cap has cost many people serious money.
Last month, the Democratic-run House voted on a largely party-line vote to get rid of the cap.
But lurking in that vote was uneasiness about the effort — among Democrats. Because data show emphatically that the rich would be the biggest winners from the change.
The nonpartisan Tax Policy Center found that the top 1% of households, or those making $755,000 or more, would get 56% of the tax cut. About 3% of middle income households, or those making between $49,000 and $86,000, would pay less in taxes, and lower income earners would get virtually nothing.
“This is a problem Democrats have. Repealing the cap...helps higher income people more than lower and middle income people,” said Howard Gleckman, senior fellow at the center.
If the entire cap is repealed — which is highly unlikely to happen anytime soon — and the top tax rate went from 37% to 39.6% as Democrats proposed last month, the average California resident with incomes of $53,500 or less — about 40% of all income earners — would get no tax cut from the repeal.
The middle 20% of state taxpayers, defined as those earning $53,500 to $86,900 would save an average of $10 each. But the state’s wealthiest 1%, those earning $963,700 or more, would save an estimated average of $79,540.
The figures were developed by the nonpartisan Institute on Taxation and Economic Policy. to project the likely effects if the Democrats’ proposal went into effect in 2022. That’s likely the earliest year when Democrats could have their policies go into full effect if the party takes control of the White House and Congress in 2021.
But raising the top rate is “not nearly enough,” said Steve Wamhoff, the institute’s director of federal tax policy, to make up for income lost by repealing the cap and easing the burden on middle and lower class earners.
Overall, 35.6% of California federal returns — higher than the national average of 30.6% — took the SALT deduction in 2017, the last uncapped year, according to the Tax Policy Center.
The California percentage of those taking the deduction grew as incomes grew. Those with adjusted gross incomes between $25,000 and $50,000 had the deduction on 18.9% of returns.
Those with incomes of $100,000 to $200,000 had the deduction on 83.4% of returns, and returns with incomes above $200,000 took the deduction at least 98% of the time.
Nationally, “there are some middle-class taxpayers who would see some benefit from the repeal, but the tax cut they receive would pale in comparison to that received by the super wealthy,” said Seth Hanlon, senior fellow at the Democratic-leaning Center for American Progress.
Democrats have pushed hard for repeal but there were 16 Democrats who voted against the legislation to lift the cap in December. Some saw repeal as a giveaway to the wealthy in high-tax, higher-income states such as California.
“Removing the SALT deduction cap is just another example of Washington making policies that benefit the powerful in New York and California, but not doing anything for working folks in Maine,” said Rep. Jared Golden, D-Maine.
Added Rep. Greg Stanton, D-Arizona: “I simply cannot support a proposal that helps the wealthiest taxpayers in other parts of the country at the expense of Arizona.”
Their views echo those of Republicans when addressing why the GOP-authored 2017 tax cut law that included the cap. GOP lawmakers were trying to simplify the tax code and curb special deductions.
One reason they’ve resisted reinstating the full state and local deduction because they see the 2017 changes as providing broad tax cuts that more than offset the impact of the cap. Most people have had lower taxes as a result of the law.
Republicans love the idea that Democrats want to proceed with their plan.
“This bill is truly a tax cut for the few,” said Rep. Kevin Brady of Texas, top Republican on the House Ways and Means Committee, of the Democrats’ repeal plan.
“I don’t understand why they want to do this,” said Sen. Charles Grassley, an Iowa Republican who heads the tax-writing Senate Finance Committee.
“They’re always complaining about the bill (the 2017 tax cut law) benefiting the top 1% of the people. They’re talking out of both sides of their mouth,” he said.
Supporters of repeal counter that while there would be a benefit for the wealthy, there would also be lots of help for middle and upper middle class taxpayers.
“I’m all for a wealth tax and I’m all for a capital gains tax on the top 1%,” said Rep. Ro Khanna, a California Democrat. “But you don’t raise taxes on the upper middle class or the middle class which is what a lot of the SALT cap was hitting.”
Republicans like to boast that the cap is a way of assuring that state and local governments don’t raise taxes too much. Democrats counter that the cap means potentially harmful restrictions on governments back home.
“The reality is it’s punitive to California,” said Rep. Jim Costa, D-California, “and to other states that have made the determination that they use state taxes, revenues for purposes that improve quality of life issues in those respective states.”
And, say supporters, it helps quality of life in another way.
“Capping the SALT deduction diminished the incentive for middle-class taxpayers to claim tax benefits that encourage home ownership and charitable deductions,” said Rep. Mike Thompson, D-California.
Since the cap was only lifted for the first time last year, there’s no solid data that suggest who’s accurate. “There not enough evidence to say things have changed one way or the other,” Gleckman said.
This story was originally published January 17, 2020 at 8:00 AM.
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