Analysis: SALT Cap Relief Is Costly and Regressive

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(Michael Burrell/Getty Images)

No matter how you slice it, there’s no way to avoid one conclusion on the state and local tax deduction: The benefits go to people who are already well-off.

A new analysis out today from the Committee for a Responsible Federal Budget (CRFB) shows that Democrats’ latest attempt to expand the SALT deduction (which was capped at $10,000 per year by Republicans in 2017) “will be both costly and regressive.” Democrats think they’ve found a way for the restoration of the deduction to be revenue-neutral, but it’s just another budget gimmick.

Here’s how it would work. Because of Congress’s budget-scoring rules during the legislative process that led to the Tax Cuts and Jobs Act (TCJA) of 2017, the SALT deduction cap is set to expire in 2026. The cap increases revenue, which is why Republicans put it in the TCJA to begin with. Democrats oppose the cap, but they need the revenue. So they want to extend the cap through 2031 to get more revenue on paper that they will then use to remove the cap through 2025. Instead of robbing Peter to pay Paul, they’re hypothetically robbing Paul from 2026 to 2031 to actually pay Paul from 2021 to 2025.

Of course, when 2025 rolls around, Democrats aren’t just going to let the deduction go away. They will then try to extend it again, which is why this is a gimmick.

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To get a deficit impact without the gimmick, the CRFB scores the proposal for only the first five years. It finds that it will add $250 billion to the debt in that time. The deduction would be fully restored for individuals making up to $550,000 and couples making up to $1.1 million. Those income limits are supposed to make the measure less regressive, but the CRFB finds it will still be regressive.

The analysis finds that 93 percent of the benefit would go to the top quintile of income earners, and 65 percent of the benefit would go to the top 5 percent. The SALT provision would be the second most expensive part of the Build Back Better bill, which Democrats say is about expanding the social safety net and rebuilding the economy, not giving more money to wealthy taxpayers.

SALT promises to become a sticking point in the Senate. Joe Manchin has expressed skepticism about a bill that relies on budget gimmicks, and relatively few taxpayers in West Virginia took the SALT deduction the last time it existed in full (the state in total got only 0.2 percent of the deduction’s nationwide benefit; California got 20.7 percent, and New York got 13.1 percent). Bob Menendez, from high-tax New Jersey, has been focused on getting the deduction restored from the very beginning. Democrats can’t lose a single vote in the Senate, and a tax cut for the well-off is set to divide them now.

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