The state and native tax cap can stay for the best earners
High earners in high-tax countries rejoiced last week to hear that Senator Bernie Sanders added relief from the state and local tax ceiling to his budget.
However, the numbers suggest that Sanders is only considering reducing the cap partially. And the latest proposal being debated in Congress would do little to help the top earners, who make up the bulk of the SALT deductions.
Sanders’ $ 6 trillion budget included $ 120 billion in aid to SALT over five years. The provision raised hopes in states like New York, New Jersey and California that the progressive wing of Democrats is open to abolishing the $ 10,000 cap on state and local tax deductions. The cap was part of the Tax Cuts and Jobs Act 2017 and resulted in an effective tax increase for many high earners in high-tax countries.
However, Sanders’ $ 120 billion provision would only cover a partial waiver. The Tax Policy Center estimates that completely lifting the SALT cap would cost about $ 450 billion in the first five years, while the Tax Foundation estimates it would cost about $ 460 billion over five years. So Sanders’ plan would be less than a third of the expected cost of lifting the cap.
A faction of 30 Democrats and Republicans have come together to form a SALT faction aimed at lifting the cap. Rep. Josh Gottheimer (DN.J.), one of the chairmen of the caucus, and others say they won’t sign a major new spending or tax bill unless the SALT cap is lifted.
More progressive Democratic Party members have criticized such a proposal as a tax gift to the rich, as 57% of the benefits of repeal would go to the 1% of top earners.
The latest compromise under discussion – and probably the one favored by Vermont’s Sanders – provides for an income limit of $ 400,000 a year, according to tax experts. The cap would be lifted entirely for those earning less than $ 400,000 a year, while taxpayers earning more would remain subject to the cap of $ 10,000. The income limit would help ensure that the benefits of abolishing SALT do not flow primarily to the rich.
Gottheimer told CNBC on Monday that he continued to support a full waiver rather than an income threshold. He said even an income limit of $ 400,000 would hurt the middle class, as high-earners in New Jersey and other high-tax countries support welfare programs with their excessive tax payments. He said that many rich are emigrating from the state to pay less taxes.
“It’s not just about the impact on income levels,” said Gottheimer. “It has a huge impact on people leaving states like mine. When people leave these countries, it has a huge impact on schools, law enforcement and firefighters hiring because the tax base drains when people move to Florida and Texas and the Carolinas, “as we see.”
An income limit would also create an “income cliff” for those earning just over $ 400,000.
Jared Walczak, the tax foundation’s vice president of government projects, said a New York tax officer who makes $ 399,000 and pays $ 45,000 in state and local taxes could deduct his SALT if a threshold of $ 400,000 was set would. But someone who makes $ 400,001 a year would pay $ 12,000 more in taxes annually as they are still subject to the SALT cap of $ 10,000.
“Even under this plan, most of the benefits would go to those relatively close to the threshold,” said Walczak.