A new report from ITEP Provides policy advice to amend the US $ 10,000 federal state and local tax (SALT) limit signed by President Trump under the Tax Cuts and Jobs Act.
Since the SALT cap mainly restricts tax deductions for the richest 5 percent of Americans, the best option is to leave the cap unchanged or replace it with another provision that further restricts tax breaks for the rich without going to specific states like the SALT. aim cap does. ITEP deployed such a proposal earlier this year. Other options to change the SALT cap will reduce revenue that could be used for other purposes in the upcoming reconciliation package, and potentially crowd out transformative investments that could slow climate change, improve college affordability, and improve economic security for families.
But Congress can at least limit the damage by changing the SALT cap, rather than lifting it. The ITEP report offers three options to limit the reach of the SALT cap, and each would cost less than a third as much as lifting it.
The SALT cap wasn’t a great idea, but it doesn’t pick it up either
The Republicans who drafted the Tax Cuts and Jobs Act (TCJA) don’t deserve applause for capping SALT deductions. They could have eliminated or reduced any number of special rules and loopholes in the tax law, but they chose to focus on the SALT deduction because it is more important in higher tax states that tend to be democratic states. Obviously, this is not a fair or sensible way of writing tax laws.
But simply lifting the SALT cap is not a solution. We estimate that if Congress lifted the SALT cap for 2022, 85 percent of the benefits would go to the richest 5 percent and 61 percent of the benefits would go to the richest 1 percent.
So why are some Democrats in Congress determined to lift, or at least limit, the SALT cap? Opponents of the SALT cap make at least two different, somewhat contradicting arguments.
They argue that the SALT cap harms the middle class. Representative Tom Suozzi (D-NY), in a opinion Earlier this year, he and his colleagues said that he would “advocate restoring the SALT withdrawal and highlighting the middle-class families wrongly injured by the cap”.
At other times, they argue that by capping deductions for state and local taxes, the cap pushes high-income people out of higher-tax states like New Jersey and New York. In one (n interview Speaking in July of the SALT cap, Rep. Suozzi said, “When wealthy people leave our states, leave our cities, leave our counties to go elsewhere, they take the revenue that goes into our households with them. It makes it much more difficult for our cities and our states and our counties to survive. “
In other words, opponents of the SALT cap claim they want to keep taxes low for the middle class, but also say they want to keep taxes low for the rich.
None of these concerns are supported by data. The SALT cap has little impact on middle-income people and there is no evidence that its impact on rich people will cause them to move.
As can be seen from the estimates downloadable from the ITEP report, most of the benefits of lifting the SALT cap would go to the richest 5 percent of the population in each state and District of Columbia. The richest percent of the population would get the most benefits in all but four states.
Almost all taxpayers among the bottom 80 percent of Americans are unaffected by the SALT cap because they either claim the standard deduction instead of individual deductions, or because they claim less than $ 10,000 in deductions for SALT.
As for the SALT cap, which causes rich people to leave high-tax countries in significant numbers, there is no evidence to support this. The most extensive research points out that it is very rare for people with high incomes to move across state lines for tax reasons, and that very wealthy people generally move less than other people.
For lawmakers who still want to reduce the reach of the SALT cap, the ITEP report describes three different policy options that would each cost around $ 30 billion in 2022. Each option has a different goal.
Congressmen concerned about the impact of the SALT cap on middle-income people might advocate lifting the cap for those on incomes below a certain threshold.
Members concerned about rich people leaving states with higher taxes might prefer an option that allows taxpayers to deduct SALT if it exceeds a certain floor, although this would benefit almost exclusively the rich.
Legislators who want an easy-to-explain policy option may prefer a proposal that simply raises the $ 10,000 cap to a higher level.
The ITEP report examines each of these three approaches. It notes that a complete removal of the SALT cap would be less desirable than either of these options.
Read the report.