High income tax states like Massachusetts, New Jersey, California, and New York would appear to be winners if President Biden’s “Build Back Better” plan is finally passed by Congress. The Trump-era limit on state and local tax deductions could provide a $200 billion (or more) wind fall for wealthy Americans.
As it stands now, Congressional Democrats, especially those who represent high tax states, are crafting a change in the SALT deduction cap. Presently American households can only deduct $10,000 of state and local taxes from their federal income taxes. That cap deduction is poised to end by 2026.
In a prior column, I explained that in exchange for their votes on Biden’s $1.7 trillion plan, high tax state legislatures insisted on lifting the amount of the SALT cap. The House Rules Committee is now working on a change that would raise the $10,000 cap to $72,500 for five years (that would be retroactive to 2021).
The largest beneficiaries, according to the Tax Policy Center, would be households earning at least seven figures. They would receive the lion’s share of benefits. As for middle-income U.S. households, the average cut in taxes would only amount to roughly $20 per year, while the higher income earners would be saving $23,000 per year.
A full 25% of the tax cuts would flow to the top 0.1% of taxpayers. For them, the average savings in taxes would be $145,000. Another 57% of the benefits would go to the top 1%, who would save roughly $33,100 annually.
The Committee for a Responsible Federal Budget, a non-partisan, non-profit economic education organization, believes the tax benefit would cost $300 billion over the next four years, with $240 billion of that cost accruing to those who make more than $200,000 a year. That would put the price tag for the SALT cap expansion on par with childcare subsidies, and the clean energy tax credits, making it the third costliest element of the overall Biden plan.
The legislation puts Democrats between a rock and a hard place. Clearly, most of the benefits would be going to the bluest-of-the-blue coastal states. The fact that it also benefits the wealthiest Americans flies in the face of the progressive side of the party, who have stomped and won their seats railing against income and wealth inequality.
In order to pass the Build Back legislation, Democrats need all hands on deck. But the group of legislators most impacted by the present SALT tax has made it clear that without a SALT deal there would be no deal on the overall Biden plan.
Over in the U.S Senate, key players are backing a different approach. They want to exempt taxpayers who make under a certain income level, from the SALT cap. That level is still being debated. Achieving a resolution between the House and the Senate will be necessary before Democrats can hope to send a new version of the budget reconciliation package to the White House.
In the middle of the debate sits the president. The framework of President Biden’s plan, released last week, did not include a SALT repeal, or change in the present tax cap. In the past, however, the president has indicated he might be open to eliminating the deduction cap altogether.
My own guess is that the Senate approach, which favors an income-based exemption, would be more palatable to a voter base that would not be interested in giving the wealthy another huge tax break.