National and local tax cap may be here to stay for top earners
High incomes from high tax states applauded the news last week that Senator Bernie Sanders had included state and local tax cap relief in his budget.
But the numbers suggest Sanders is only considering a partial reduction in the cap. And the latest proposal discussed in Congress wouldn’t do much to help the higher earners who make up the largest share of SALT deductions.
Sanders’ $ 6 trillion budget included $ 120 billion for SALT relief over five years. The provision has boosted hope in states like New York, New Jersey and California that the progressive wing of the Democratic Party is prepared to remove the $ 10,000 cap on state and local tax deductions. The cap was part of the Tax Cuts and Jobs Act of 2017 and created an effective tax hike for many high earners in high tax states.
Yet Sanders’ $ 120 billion provision would only cover a partial repeal. The Tax Policy Center estimates that a complete repeal of the SALT cap would cost around $ 450 billion in the first five years, while the Tax Foundation estimates it would cost around $ 460 billion over five years. Sanders’ plan would therefore represent less than a third of the expected cost of repealing the cap.
A caucus of 30 Democrats and Republicans met to form a SALT caucus aimed at repealing the cap. Representative Josh Gottheimer, DN.J. – one of the caucus chairs – and others say they won’t sign another big spending or tax bill without the SALT cap being repealed.
More progressive members of the Democratic Party criticized such a proposal as a tax giveaway to the rich, since 57% of the benefits of a repeal would go to the richest 1%.
The latest compromise under discussion – and probably the one favored by Sanders of Vermont, tax experts say – establishes an income threshold of $ 400,000 per year. The cap would be fully lifted for those earning less than $ 400,000 per year, while filers earning more would still be subject to the $ 10,000 cap. The income threshold would help ensure that the benefits of a SALT repeal do not primarily accrue to the wealthy.
Gottheimer told CNBC on Monday that he continued to support a full repeal rather than an income threshold. He said even an income threshold of $ 400,000 would hurt the middle class, as super-earners in New Jersey and other high-tax states support social programs through their inordinate tax payments. He said many wealthy people appear to be leaving the state seeking to pay less in taxes.
“It’s not just about the impact on income levels,” Gottheimer said. “It has a huge impact on people leaving states like mine. As a result, when people leave, it has a big effect on schools, hiring law enforcement and firefighters, because the plate tax runs out when people move to Florida, Texas and the Carolinas as seen. “
An income threshold would also create an “income cliff” for those earning just over $ 400,000.
Jared Walczak, vice president of state projects at the Tax Foundation, said a New York tax filer earning $ 399,000 and paying $ 45,000 in state and local taxes would be able to deduct his SALT if a threshold of $ 400,000 was established. But someone making $ 400,001 per year would pay $ 12,000 more in taxes per year because they would still be subject to the SALT cap of $ 10,000.
“Even under this plan, most of the benefits would flow to those relatively close to the threshold,” Walczak said.