“No salt, no dice.” This is the message New Jersey Representative Josh Gottheimer and other high-tax Democratic lawmakers are delivering to President Joe Biden. The group says they will withhold support for Biden’s comprehensive welfare spending package if it doesn’t include lifting the federal ceiling on deductions for state and local taxes or SALT.
Prior to the 2017 Tax Act, taxpayers who had reported their deductions were generally able to deduct most of the state and local taxes they paid from their federal taxable income. A provision in the law limited the deduction to $ 10,000, a blow to some taxpayers in high-tax countries such as New Jersey, New York, Connecticut, and California.
The full recovery of the SALT depreciation is hard to sell. The deduction benefits high-income taxpayers and loses a lot of money for the federal government. As pointed out by my Bloomberg colleague Justin Fox, other tax changes in 2017, particularly those related to the alternative minimum tax, resulted in most taxpayers, including those in high-tax countries, lowering their tax rates on average despite the SALT deduction lid .
Still, these are averages. Some taxpayers in the boroughs of these legislatures, including those who are not millionaires, have been hit by the deduction limit.
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It’s hard to generalize, but they tend to include those who were not previously subject to the AMT (hence they were used to taking the full SALT deduction). Democrats in high tax countries are under pressure knowing the importance of SALT to voters and they feel an opportunity as key political leaders have shown their support.
Ideally, there should be, among other things, simplified tax legislation with lower rates and fewer deductions. However, since this doesn’t seem likely anytime soon, a suggestion from Representative Lauren Underwood, an Illinois Democrat, may find a more practical way forward.
Underwood is calling for the federal limit to be increased to $ 15,000 for single applicants and $ 30,000 for those who are married and file together. Currently, the $ 10,000 limit applies to taxpayers who are both single and married and file together. And she wants those values to rise in line with inflation each year, which the $ 10,000 cap currently doesn’t.
By maintaining a withdrawal limit, you can ensure that the richest don’t make the biggest profits. A complete removal of the cap would be the top 1% of the workforce (earning $ 540,000 or more) the greatest disruption, with an after-tax income increase of 2.8% according to Tax Foundation estimates. Limiting the deduction to Underwood’s limits would mean an increase of only 0.37%, with other income quintiles benefiting more.
While the proposed caps of $ 15,000 and $ 30,000 may not seem like such significant increases from $ 10,000, they are more in line with average taxpayer SALT deductions in the $ 100,000 to $ 200,000 ($ 11,500) range and for the range of $ 200,000 to $ 500,000 ($ 23,400) – in accordance with Calculations from the Tax Policy Center before the cap was set.
Take a look at New York. The average SALT withdrawal was more than $ 10,000 in dozens of less affluent counties in the upstate. A cap of $ 15,000 or $ 30,000 could potentially benefit many taxpayers who are considered middle class in these places.
It is important to note that it is difficult to accurately assess who would benefit from higher SALT limits because of the interaction with the standard fume cupboard. Taxpayers can list and deduct their deductions, including SALT, from their taxable income or take the standard deduction doubled under the 2017 Tax Act. In 2021, the standard deduction is $ 12,550 for single applicants and $ 25,100 for joint applicants.
The proposal also addresses an unfair marriage penalty where two single applicants could each request a SALT deduction of $ 10,000. However, once they get married and file together, they’re still capped at $ 10,000 (or $ 5,000 if they’re married apart). Tax law has set some ways the tax law penalizes married couples, but the SALT cap remains an outlier.
Finally, the cost of increasing the SALT cap, rather than removing it entirely, is much less. It is estimated that if the cap were lifted completely, it would reduce federal revenue by $ 380 billion if it stayed on the books through 2026 (when it is due to expire under tax law). Increasing the cap to $ 15,000 or $ 30,000 would cost $ 135 billion over the same period, the Tax Foundation estimates.
There are other ways to change the SALT cap, such as: B. to only allow the benefit for the income of taxpayers under certain incomes or to exchange the deduction for a credit. But Underwoods seems to be the most focused, effective, and least stressful.
Unless supporters of the SALT deduction want to wait for the cap to expire in late 2025, their plan could be the best compromise to help taxpayers who might actually need a break now.
This column does not necessarily reflect the views of the editors or of Bloomberg LP or its owners.
To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net
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