Democrats struck a chord with voters in the 2020 elections by campaigning on the need for the wealthiest Americans to pay higher taxes. Now the party is flirting with a major change in tax policy that would allow the wealthiest Americans to pay lower taxes.
A bloc of House Democrats, mostly from the New York area, are loudly withholding support for a broad package of tax increases to fund President Biden’s infrastructure plan unless it also includes a tax cut: an unlimited deduction for state and local tax payments, or SALT.
In the narrowly divided House, it takes only a handful of Democrats to derail the president’s agenda by making common cause with do-nothing Republicans. In an open letter last week addressed to the House speaker, Nancy Pelosi, 17 of the 19 Democrats who represent New York threatened to do exactly that, writing that they “reserve the right” to vote against any tax increase that does not include a “full repeal” of the $10,000 limit on the SALT deduction, enacted in 2017.
A number of Democrats from other states, including New Jersey and California, have taken a similar stand. Representative Josh Gottheimer of New Jersey held a news conference last week behind a lectern emblazoned with the logo “No SALT, no dice.”
Proponents of an unlimited SALT deduction say they are seeking to help middle-class taxpayers. If so, they should go back to the drawing board. The top 20 percent of American households, ranked by income, would receive 96 percent of the benefits of the change, according to a detailed analysis by the widely respected Urban-Brookings Tax Policy Center.
The primary beneficiaries would be an even smaller group of the very wealthiest Americans. The 1 percent of households with the highest incomes would receive 54 percent of the benefit, on average paying about $36,000 less per year in federal income taxes.
A tax cut with such a skewed distribution of benefits ought to be unacceptable to any politician genuinely concerned about the rise of economic inequality.
The federal government lets Americans reduce their taxable income either by a standard amount or by the amount spent on such categories as SALT, interest on mortgage loans and charitable contributions. The 2017 law imposed a $10,000 limit on the deductibility of SALT and a separate limit on mortgage interest deductions.
The SALT deduction cap is unfair. The deduction is often described as a federal subsidy for state and local governments because the federal government effectively is paying for a portion of each dollar in state and local taxes. Capping the deduction has the effect of providing a smaller subsidy, per dollar, to jurisdictions that collect more money in taxes.
New Yorkers, who pay higher taxes than most Americans, get more extensive and higher quality public services. Residents of other states choose lower taxes and less government. Federal tax policy should provide consistent support for either choice.
This board historically has opposed the elimination of the federal subsidy. But the rise of economic inequality has increased our focus on the distribution of taxation and led us to a different conclusion: Instead of eliminating the SALT deduction cap, Congress should eliminate the deduction.
The SALT deduction is an inefficient subsidy. The primary beneficiaries are the wealthy people who get a tax break. It would make more sense to collect those dollars from the wealthy and then to provide direct federal financial support to state and local governments.
Proponents of an unlimited SALT deduction have worked hard to portray the cap as a burden on a broad portion of the population. This is wrong in two important respects. First, the existence of the SALT deduction is the primary inequity. It shifts the distribution of taxation off the shoulders of the wealthy and onto the shoulders of the majority who do not make enough money to itemize tax deductions. The bigger the deduction, the greater the inequity.
Second, lifting the cap would primarily benefit the very wealthy. The Tax Policy Center estimates that 16 percent of households making between $100,000 and $200,000 annually would benefit from an unlimited SALT deduction, but that the average benefit would be just $130. Almost everyone making more than a million dollars a year would benefit — on average by more than $44,000.
The Biden administration has avoided taking a stand on the issue beyond indicating that proponents of a SALT deduction restoration would need to find a way to offset the lost revenue, estimated at almost $90 billion in 2021 alone. But it makes little sense to find another way of raising taxes on the rich so that the money can be returned to the same people.
Mr. Gottheimer, for example, proposed last week that the cost of the SALT plan could be offset by increased Internal Revenue Service enforcement to “collect what people owe already.” Is he seriously suggesting that his support for enforcement of the nation’s tax laws is contingent on a tax cut? The necessity of stronger tax enforcement is clear, but it ought to be pursued on the merits, and the government surely can find better uses for the money it collects.
Most members of this editorial board are paying more in federal taxes because of the SALT deduction cap. In a narrow financial sense, we would benefit from its repeal. But we believe in the broader benefits of progressive taxation, and in the necessity of concrete steps toward creating a more equal society. Members of Congress who have espoused those principles repeatedly now have an important opportunity to demonstrate their sincerity.
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