Opinion

WILFORD: Democrats Continue To Throw the Kitchen Sink At Tax Deduction Cap For The Rich

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Andrew Wilford National Taxpayers' Union Foundation
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Few causes motivate Members of Congress from high-tax states more than eliminating the $10,000 cap on the State and Local Tax (SALT) deduction.

Despite the fact that eliminating the cap conflicts with just about every stated principle of progressivism, Democrats are willing to waste a great deal of time and effort trying to get around the cap. Fortunately, it’s likely to all be for naught.

Despite the fact that lifting the cap on SALT would create more benefit for the top 1 percent than all other taxpayers combined, Democrats from high-tax states have made eliminating or raising the SALT cap a priority ever since it came into effect. That’s largely out of fear that, without the ability to write off a substantial portion of their state tax burden on their federal taxes, their wealthy residents would flee to greener pastures in low-tax states.

That’s a well-founded concern, but their preferred solution hurts everyone else. The SALT deduction effectively allows high-tax states to pass the burden of their high taxes on to Americans across the rest of the country, who have to pay more to make up for the revenue the federal government loses on the SALT deduction.

Nevertheless, Democrats in high-tax states have tried just about everything they can to restore their favorite tax break for the wealthy. The first recourse they tried was a lawsuit spearheaded by Maryland, New Jersey, New York and Connecticut. The claim was that the repeal of the SALT deduction was intended to harm high-tax states, and in violation of the Tenth Amendment.

Ironically, by these states’ own argument, their own tax policies are harming their citizens. The contention that these states would suffer if their residents were subjected to the full brunt of the tax policies that they intentionally passed into law is probably true, but that by no means makes it the federal government’s problem.

After all, it doesn’t require a law degree to see that this argument doesn’t pass the smell test. Why would the federal government be constitutionally required to offer a specific tax deduction? Both the U.S. District Court for the Southern District of New York and the Second Circuit did not buy this argument, and attempts to appeal the case to the Supreme Court are not likely to succeed either.

States have tried other legal workarounds as well. Some have tried to allow their taxpayers to make “charitable contributions” to a government fund in return for a corresponding credit against their state tax liability. The idea is that their taxpayers could then claim the (non-capped) deduction for charitable contributions instead of the SALT deduction.

The IRS was predictably unamused by these unsubtle workarounds. It quickly warned states that it would crack down on any such schemes — a stance which led to yet another round of pointless lawsuits.

By far the most practical recourse that SALT proponents have is to try to pass legislation repealing or raising the cap on the SALT deduction in Congress. But the odds of even this happening seem to be reduced after the Build Back Better Act was put on hold and key swing vote Joe Manchin expressed skepticism about lifting the SALT cap. Even with these long odds, some representatives of high-tax states have said that they will oppose any version of Build Back Better that does not raise the SALT deduction cap.

If Democrats were willing to exert just a fraction of the energy they are currently pouring into expanding a tax break for the wealthiest taxpayers into real priorities like reining in out-of-control spending or curbing inflation, we’d be sitting on a trillion-dollar surplus and you’d feel a lot better about your savings. Just don’t hold your breath.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.