Saturday, May 8, 2021

SALT Deduction Cap Fight

I play chess. I hate when my opponent manipulates me into a situation with no good choices. I don't think that former President Trump and his merry band of sycophants are good chess players but they did box in the Democrats on an issue that divides people along class and regional lines. 
I am referring to the 2017 tax law which capped the individual federal tax deduction for state and local income and property taxes or SALT at $10,000. This deduction was previously unlimited
So before 2017 someone who owned a mansion or other expensive property as their primary residence could deduct the entire state or local property tax or income tax owed from his or her federal income tax liability. But they can't do that today. 
Some people who pay high local income and property taxes don't like the new law. Not one bit. Many of the people most impacted are well off or wealthy Democrats in politically Democratic or "blue states".  
It's ironic because much of the Democratic messaging is that the well off should pay their fair share, which is in part what the SALT $10,000 deduction cap does, even though that's NOT why Trump and Republicans put it into place. I think the issue is probably the perceived unfairness that someone with a million dollar home in say Texas or Alabama is, all else equal, paying less in overall taxes than someone with the same priced home in California or New York. 
As many relatives or friends in California or New York are quick to remind me, neither their income nor their housing cost goes as far in either state as it would in the Midwest, the South, or the interior West.
And in recent weeks, legislators from high-tax states like California, New Jersey and New York have formed a SALT Caucus to further champion a full repeal of the provision, particularly as Democrats contemplate significant changes to the tax code to pay for Mr. Biden’s infrastructure plan.

The most vocal of them are from New York State — where voters claimed the nation’s highest SALT benefit before the tax cuts — who wrote an open letter to Speaker Nancy Pelosi saying they “reserve the right” to oppose any new tax legislation, including Mr. Biden’s infrastructure bill, that doesn’t include a full repeal of the SALT cap. 

“I want to get all this stuff done, but no SALT, no deal,” said Representative Tom Suozzi, a New York Democrat and former certified public accountant. “This is existential for my state.” 
Noticeably absent from the 17 New York Democrats who signed the recent letter was Representative Alexandria Ocasio-Cortez. “I think it’s a giveaway to the rich,” she told reporters last month. 
“So, I do not believe in holding the entire infrastructure package hostage for a full repeal and abolishing the cap. I think we can have a conversation about the policy, but it’s a bit of an extreme position, to be frank.” 
There’s no debate that the SALT deduction goes mostly to wealthier taxpayers. About 85 percent of its benefits accrue to the richest 5 percent of households, according to an analysis by the Institute on Taxation and Economic Policy in Washington. 
Were the cap to be repealed, about two-thirds of the benefits — about $67 billion — would go to families making over $200,000 a year.

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Unlimited SALT deductions allow people to eat their cake and have it too. People aren't paying the full cost for the policies and infrastructure they say they want.
California, New Jersey, and New York can lower their residents' local tax burden. They don't need federal permission for that. If people decide that they don't like paying high taxes in those states they are free to move.
I'm not sure it's a matter of justice to insist that all the other states--that is to say the federal government--subsidize a given state's self-imposed high  tax rates. There are many tax policies that are designed to benefit a particular subset of people.
I wouldn't like losing the tax deduction for primary residence mortgage interest but if I did, would I threaten to torpedo the current President's domestic agenda? Probably not.
President Trump and crew almost certainly saw the limit on SALT deductions as a way to stick it to coastal Democrats. However if in response more Democrats from the Northeast or California moved into the nation's interior, some of the voting patterns of certain reliably "red" states would start to change. 
And a Senate that is split 50/50 and a House with a slim Democratic majority would trend towards Democrats. So the SALT  deduction limit could rebound to Democratic advantages. We shall see. But the temper tantrum being thrown by certain New York politicians proves that "Don't tax me. Tax that man behind the tree!" is a saying beloved by Democrats as well as Republicans.
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