As Democrats have moved left economically, their party has also grown more concentrated in the richest parts of the country. That explains the strange spectacle of a Democratic presidential field running on the most redistributionist agenda in memory even as Democrats in Congress try to expand a tax break for high-earners in the New York City, San Francisco and Los Angeles metropolitan areas.
The GOP tax reform of 2017 capped at $10,000 the amount of state and local taxes that Americans could deduct from federal taxable income. This was one of the biggest revenue raisers in the bill, funding the personal and business rate cuts. Yet the rich and upper middle-class in high-tax parts of California and the Northeast lost a valuable deduction.
Coastal Democrats have failed with gimmicks at the state and federal level to eliminate the SALT cap. The latest effort is the Restoring Tax Fairness for States and Localities Act, which passed the House Ways and Means Committee last week. It won’t become law as long as Republicans control the Senate, but it illustrates how a coastal and urban-dominated Democratic Party might change the tax code.
The bill would raise the SALT deduction cap in 2019 and eliminate it in 2020 and 2021. It claims to pay for this by raising the top tax rate back to 39.6% from 37%, as well as lowering the income threshold at which the top rate applies (from $518,400 to $441,475 for singles). This would hit professionals and others who do well but are far from rich.
But wait. Those rate hikes don’t raise nearly enough money to cover the annual cost of busting the SALT cap. The Congressional Budget Office estimates that in 2021 the tax increases would raise $28.7 billion while the expanded SALT deduction would cost $88.7 billion. So to make the bill appear revenue-neutral, the SALT cap is only eliminated for two years while the rate hikes last six years, through 2025.
In other words, the Democrats want to front load a tax cut on the wealthy that they don’t know how to pay for, so they’re playing games with the 10-year window Congress uses for scoring policy changes. The Tax Foundation found the biggest benefit from the unlimited deduction went to households with incomes above $1 million.
Democrats may hope that in a few years they can eliminate the SALT deduction cap permanently when they have a majority to support even bigger offsetting tax increases. Yet the deduction remains regressive and does nothing for growth or fairness. It also shrinks the tax base and thus raises pressure for higher tax rates on everyone, including the middle class.
How to square progressive rhetoric about the undeserving rich and the necessity of redistribution with their attachment to a deduction that overwhelmingly benefits the affluent? Part of it is pressure from affluent professionals who are an important part of the Democratic base on social issues.
Perhaps more important is that states like New York depend on the wealthy to finance high government spending. The SALT cap increases the incentives of the wealthy to move to low-tax Texas or Florida. Democrats may want to soak the rich, but not if it puts pressure on their state and local government model.
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December 18, 2019 at 07:16AM
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Democrats’ SALT Sleight-of-Hand - The Wall Street Journal
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