Several Democrats from high-tax states have threatened to vote against Biden’s infrastructure plan if it does not include a full repeal of the State and Local Tax (SALT) deduction cap. This repeal would disproportionately benefit wealthy Americans.
As reported by Politico, dozens of Democrats have made this threat. On Tuesday, a powerful group of House Democrats — all but two members of the New York delegation — sent a letter demanding that the repeal of the SALT deduction cap be a part of any tax-related bills Congress takes up. Notably, Rep. Alexandria Ocasio-Cortez was one of the New York Democrats who refused to sign onto this letter. She had also voted against repealing the SALT deduction cap in 2019.
Several New Jersey Democrats like Rep. Josh Gottheimer and Rep. Bill Pascrell have also called for the repeal’s inclusion in President Biden’s next legislative package.
In a press release by Senators Chuck Schumer and Kirsten Gillibrand, Sen. Gillibrand said, “I am proud to join my colleagues to introduce legislation to repeal the cap on the State and Local Tax deduction, a cynical policy passed by Republicans as a way to repay wealthy donors and lobbyists with big corporate tax cuts,” said Senator Gillibrand. This statement is especially ironic considering that lifting the SALT cap would be much more favorable to the rich than the Tax Cuts and Jobs Act was—with almost three times as much of the benefit going to the top one percent.
All of this begs the question: what is more important to these Democrats? A multi-trillion infrastructure bill, which they claim the country desperately needs, or tax cuts for their rich constituents?
Many progressives have noted that the SALT deduction disproportionately benefits the wealthy. The New York Times described the SALT deduction as “The Tax Cut for the Rich That Democrats Love.” The Center for American Progress has stated that repeal of the SALT cap “should not be a top priority” as it would “overwhelmingly benefit the wealthy, not the middle class.”
The left-of-center Tax Policy Center found that the top 1 percent of households would receive 56 percent of the benefit of repealing the SALT cap, and the top 5 percent of households would receive over 80 percent of the benefit. The bottom 80 percent of households would receive just 4 percent.
Similarly, the Brookings Institution explained that almost all (96 percent) of the benefits of SALT cap repeal would go to the top quintile, 57 percent would benefit the top one percent (a cut of $33,100), and 25 percent would benefit the top 0.1 percent (for an average tax cut of nearly $145,000). Whether or not this is a tax cut for the wealthy is not up for debate—the evidence is clear.
Repealing the SALT cap would be a costly addition to Biden’s spending plan. Fully repealing the SALT deduction cap would cost $80 billion per year, or $400 billion in total, as the cap sunsets in 2026 along with several other tax provisions. This $400 billion proposal would tie Medicaid expansion for the single largest category in Joe Biden’s infrastructure plan. Because Democrats are attempting to fund this bill through tax hikes, the repeal of the SALT deduction cap could result in Democrats raising taxes elsewhere, including taxes directly or indirectly on low- and middle-income Americans.
Democrats falsely claim that when the unlimited SALT Cap was repealed, Americans in blue states like New Jersey and New York saw a massive tax hike and were hit with double taxation, as they now pay federal taxes on income that was already subject to state and local taxes.
In reality, a majority of Americans do not claim the SALT deduction, or any deduction. Instead, they claim the standard deduction. In 2018, 133 million American taxpayers (or 87% of filers) claimed the standard deduction. These taxpayers deduct zero state and local taxes, so they have no protection against double taxation.
Democrats from high-tax states are desperate to repeal the SALT deduction cap because their constituents do not like the true burden of high taxes if they cannot deduct it. Quantitative evidence shows that the SALT deduction does make high-income Americans more tolerant of high state taxes.
The high costs of living in states like New York, New Jersey, and California has resulted in a mass exodus. In New York, 66.4 percent of total moves were outbound. Similarly, 60.6 percent of New Jersey’s total moves were outbound.
Because their state legislatures refuse to provide relief for their constituents, Democrats are attempting to curb the sting of high taxes from the U.S. Congress.
At the same time President Biden and others on the left are pushing for the wealthy to “pay their fair share” in higher taxes, Blue State Democrats are pushing for tax cuts for their own wealthy constituents.