Take yourself into the mind of a progressive for a moment. Your primary concern is wealth inequality, and you think the tax code is irredeemably rigged in favor of the wealthy. You have a once-in-a-generation opportunity to pass partisan legislation, but are limited in how much you can “spend.”
How much, then, do you “spend” on a tax change for which less than four percent of the benefit goes to the bottom 80 percent of taxpayers by adjusted gross income? Keep in mind that 98.6% of taxpayers with incomes below $100,000 per year would receive absolutely no benefit from this change. Meanwhile, the top one percent would see more than half of the benefit.
If you have a shred of intellectual honesty, the answer is obvious. This tax change should never have been in the cards in the first place — and as negotiations become even more serious with senators concerned about the high cumulative budget impact of your proposals, a provision uncapping the state and local tax (SALT) deduction certainly should have been the first one to go.
It must not be so obvious to House Democrats, however. Rep. Richard Neal, the chairman of the House Ways and Means Committee, recently insisted that proposals to remove the cap on the SALT deduction were still in play.
In 2017, as part of the Tax Cuts and Jobs Act (TCJA), Congress placed a $10,000 cap on the benefit a taxpayer could receive from the SALT deduction, which is primarily used by wealthy households in states with high tax burdens. This change is just one reason, albeit a significant one, why the TCJA made the tax code more progressive, not less.
So why are some Democrats fighting tooth and nail to include removing the SALT cap in the reconciliation bill? Why are they trying so hard to reframe the issue as a “direct assault on hardworking men and women of labor” and comparing their cause to that of Mahatma Gandhi?
The main reason is that many high-tax states fear that, without the SALT deduction, wealthy residents will get fed up with being treated as gold mines to fund excessively large governments. With the SALT cap in place, high-tax states could tell their wealthy residents that while their state and local tax burden is high, they can always write off the amount they pay on their federal taxes, blunting the impact.
The truth is that Democrats want it both ways — they want to be able to treat their wealthier residents like cash cows, taxing them for all they’re worth, but they don’t want those residents to actually feel any pain in their wallets to the point where they would pack up and leave. The scheme falls apart the moment these high-tax states lose the federal provision that compensates wealthier residents for their high state and local tax burdens on their federal tax returns.
But this is such an absurdly roundabout way of avoiding the conclusion that taxpayers should feel like they are being treated fairly by their governments. As progressives continually demand more and more spending while insisting that the richest Americans can cover the bill if they’d only start paying their “fair share” (a demand that seems unrelated to how much the wealthy actually pay in taxes), it’s understandable that wealthier Americans may decide to leave for a state that sees them as contributors, not leeches.
And as remote work has grown during the pandemic, taxpayers will soon have even more freedom to move to greener pastures, without the need to stick to urban job centers. If federal tax law doesn’t erase a portion of excessive state tax burdens, high-tax states rightly fear an exodus of their tax base.
Lawmakers should recognize that proposals to remove the SALT deduction cap should be the absolute first thing off the negotiating table. Otherwise, it’s hard for them to argue with a straight face that they are championing the average American.
Andrew Wilford is a policy analyst at the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.