A bill passed this morning in the U.S. House of Representatives would lift the cap on state and local income tax (SALT) deductions from $10,000 to $80,000. The provision would provide tax relief for many top earners and owners of expensive homes in high tax blue states.
New Yorkers would certainly feel the impact of the measure as the New York City metro area alone contains twelve of the 16 U.S. counties with average single-family home property tax bills of $10,000 or more.
According to a Roll Call analysis, five of the 14 congressional districts whose residents pay the highest average state and local income taxes are located in New York State, including the top two. Tom Suozzi, whose Nassau County district is number nine on the list, has been a leading advocate in the House for eliminating or raising the SALT cap.
But the provision may not make it into law.
The provision is part of a broader $1.7 trillion “Build Back Better” spending bill—funding everything from green energy tax credits to universal pre-K— that the President and Congressional Democrats are trying to enact over strenuous Republican objection. The bill failed to get a single Republican vote in the House today, and its only avenue to the President’s desk is a narrow legislative path through the Senate requiring unanimous Democratic support.
Maintaining that unanimity may require the SALT provision be amended when the Senate takes up the bill next month. Senate Budget Chairman Bernie Sanders and New Jersey Senator Robert Menendez want to remove the SALT cap entirely for most filers, but leave it at $10,000 for high earners with incomes above $400,000 or a slightly higher threshold.
The Sanders-Menendez proposal is likely to garner significant support. Why?
First, there is the budget math. Raising the cap to $80,000 is projected by the Congressional Budget Office (CBO) to cost the Treasury about $50 billion per year in lost revenue. That revenue could be used to pay for even more social spending within the legislation, or to address its current $367 billion net cost. The House bill mitigates this problem by using a budgetary sleight of hand to make the cap hike nearly cost-neutral over a decade by eliminating the existing sunset date for the SALT cap. That means the $80,000 cap would stay in place for six years after the $10,000 cap is technically set to expire.
More troubling for the Democrats than the budgetary math is the political math. From the President on down, Democrats have broadly defended the “Build Back Better” bill as legislation that finances important social spending and energy priorities by taxing only those that earn over $400,000.
In other words, they say the bills “soak the rich” qualities are a feature, not a bug.
And it certainly targets high earners as a revenue source. For instance, the bill would levy a five percent surcharge on high-earning individuals, estates and trusts with income over $10 million, and an additional three percent surcharge on those with income over $25 million.
But the SALT cap hike muddies the message.
A Tax Policy Center analysis finds that households earning under $175,000 would get only six percent of the benefit of lifting the cap to $80,000, while one-third of the benefit would go to the top-earning one-percent of households (those earning $870,000 or more.) That makes the House provision politically awkward.
And it makes the Sanders-Menendez proposal a politically viable alternative whose benefit is directed toward middle and upper-middle income households that aren’t earning quite enough to put them on the Democrats broader hit list.
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