Why blue-state Dems are fighting to give the rich a tax cut

·Senior Editor
·6-min read

“The 360” shows you diverse perspectives on the day’s top stories and debates.

What’s happening

In negotiations over the Democrats’ massive social spending proposal, lawmakers representing some of the bluest parts of the country are fighting for an unexpected cause: a tax cut for the rich.

The debate centers around the state and local tax deduction, commonly referred to as SALT, which allows taxpayers to lower their federal tax bill by deducting what they paid in state and local taxes from their income. The SALT deduction is technically available to everyone, but it has historically been most beneficial to high-earners living in cities and states with high tax rates. In 2017, the Republican-led Congress put a $10,000 limit on the deduction as part of former President Donald Trump’s tax overhaul. That change disproportionately affected blue states, since they have the highest tax rates and greatest concentration of wealthy residents.

For months, Democratic lawmakers from states like California, New York and New Jersey have been pushing for a repeal of the SALT cap to be part of the Build Back Better plan — with some going so far as to proclaim “No SALT, no deal.” Multiple studies have found that the benefits of repealing the cap would almost exclusively go to the richest Americans. According to one analysis, the top 0.1 percent of earners would get an average tax cut of more than $150,000, while middle-income households would save about $37.

Why there’s debate

Unsurprisingly, many Democrats oppose their colleagues’ push to get rid of the SALT cap. Among the most vocal has been Vermont independent Sen. Bernie Sanders, who said repealing the cap would be a betrayal of the vision the party pitched to voters during the campaign, namely that “the very wealthy finally pay their fair share.”

Eliminating the cap would also mean the government would miss out on as much as $85 billion in potential tax revenue a year, money that could be used to fund a variety of programs in the social spending bill. Conservatives, typically fans of tax cuts, almost uniformly oppose lifting the SALT cap, because they believe it would motivate blue states and cities to raise their local tax rates even higher.

Proponents of lifting the cap argue that the current setup unfairly punishes people who live in high tax states. Senate Majority Leader Chuck Schumer, who represents New York, has said the current system is akin to “double taxing” that takes away money local citizens can invest in their communities. House Speaker Nancy Pelosi said the cap has been “devastating” to residents of her home state of California since it was implemented.

Despite strong opposition from some Democrats, there is also a general understanding within the party of the political incentives behind the push to reinstate SALT. Sanders has said he’s open to a “compromise approach” that allows pro-SALT members to give some relief to their constituents, but limits how much the ultra-wealthy benefit.

What’s next

The most recent version of the Build Back Better plan included just that sort of compromise. It would lift the cap from $10,000 to $80,000 for the next decade. It’s too early to know whether that plan will satisfy skeptics in the House or Senate, however.

Perspectives

Repealing the SALT cap would violate the core principles of Democrats’ agenda

“Democrats have billed the president’s agenda as a job-creating and social-safety-net-enhancing plan that would make the tax code more progressive. … Retroactively repealing limits on the SALT deduction proposal would go in exactly the opposite direction.” — Garrett Watson, Daily News

Lower tax revenue means less money to fund important programs

“Repealing the SALT cap, even temporarily, also carries an enormous opportunity cost. At a time when Democrats are slashing the size of President Biden’s Build Back Better social spending bill to satisfy moderates, the SALT cap repeal is sucking up billions of dollars that could be used elsewhere.” — Howard Gleckman, Forbes

Congress should give a handout to states that tax their citizens too much

“Blue state Democrats have been fighting to bring back the ability for wealthy residents of high-tax jurisdictions to deduct their state and local taxes from their federal bill. For decades, it was a destructive policy that forced residents of low-tax states to effectively subsidize the tax and spend policies of more liberal states.” — Philip Klein, National Review

The SALT deduction fuels inequality

“By capping the SALT deduction, Congress started to dismantle one pillar of a racist system, one that impedes racial equality. We should not rebuild it. Instead, let’s fund programs that will actually take steps to make America more equitable.” — Michael Bader and Alana Hackshaw, Politico

There are better ways to ensure states have money to fund social programs

“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.” — Editorial, New York Times

Political pressure means Democrats will be forced to enact some form of SALT reform

“The top Democrat in the House is from California and the top Democrat in the Senate is from New York, so there is still plenty of incentive for some SALT repeal. … Plus leadership has no choice, with the bloc of Democrats committed to a SALT fix.” — Ben Jacobs, New York

Conservatives should love SALT

“The SALT cap is manna from heaven for national politicians eager to expand the federal government, all the while shrinking the ability of cities and states to tax, and therefore to control their own policies. Basically the cap turns the Founders’ vision of a federal government with powers ‘few and defined’ on its [head].” — John Tamny, Wall Street Journal

Capping SALT makes states hesitant to invest in their citizens

“Allowing taxpayers to deduct the full amount of their state and local taxes on their federal tax returns is one of the federal government’s most powerful tools for incentivizing states and local governments to invest in critical public services.” — Randi Weingarten and Edward A. Kelly, The Hill

SALT helps the middle class, too

“You know what, folks? ‘The Rich’ aren’t the only people hurt by the SALT cap — a fact that far too few people appreciate and almost no one seems to be discussing. Many homeowners of relatively modest means have been hurt by the cap because it has reduced the market value of their homes.” — Allan Sloan, Washington Post

There’s space for a middle ground that helps the middle class and not the wealthy

“In a high-cost state like New Jersey, with its brutal property taxes, the SALT cap hits the middle class, too. … The challenge is to fashion a compromise that protects the middle class, without providing a windfall for the rich.” — Tom Moran, Star-Ledger

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Photo illustration: Yahoo News; photos: Chip Somodevilla/Getty Images, Samuel Corum/Getty Images

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