(The Center Square) – New Jersey Democrats are pushing President Joe Biden to repeal the State and Local Tax (SALT) deduction cap, but a new analysis says doing so “would worsen racial income and wealth inequities.”
New Jersey Gov. Phil Murphy joined other Democratic governors, including New York Gov. Andrew Cuomo, in calling for a repeal of the deduction cap, saying it disproportionately impacts their states, Bloomberg reported.
The 2017 tax law passed under President Donald Trump capped deductions for state and local taxes paid at $10,000 per year through 2025. In a letter to Treasury Secretary Janet Yellen, U.S. Rep. Josh Gottheimer, D-N.J., said the 2017 tax law raised taxes for a “significant number” of his constituents.
Gottheimer is among the politicians supporting a repeal of the cap as part of Biden’s proposed multi-trillion dollar infrastructure spending plan.
Citing testimony from IRS Commissioner Charles Rettig that there may be upward of $1 trillion in unpaid federal taxes every year, Gottheimer is co-sponsoring H.R. 1200, the Stop CHEATERS Act. The lawmaker wants to spend more on enforcing income tax compliance, arguing it could generate an additional $1.2 trillion for the federal government and help fund “a robust infrastructure package.”
“When looking for how to responsibly fund infrastructure and SALT, the Administration should support an aggressive move to close the tax gap, including hiring additional IRS agents to enforce current tax laws,” Gottheimer, the “founding co-chair” of the new SALT Caucus, said in his letter.
However, a new analysis from the left-leaning Institute on Taxation and Economic Policy (ITEP) found repealing the SALT cap “would worsen racial income and wealth inequities.”
The ITEP analysis found that repealing “the SALT cap would worsen the racial income and wealth divides by primarily benefiting wealthy white households. It would also likely crowd out other, much more progressive policies and programs from the upcoming infrastructure package while doing comparatively little to encourage progressive revenue raising at the state and local levels.”
Instead, ITEP said lawmakers should replace the cap with “a more expansive limitation on itemized deductions such as a broader cap, a floor” or its proposed High-Income Tax (HIT) proposal.
“A previous ITEP analysis showed the lopsided distribution of SALT cap repeal by income level,” according to the ITEP report. “The vast majority of families would not benefit financially from repeal and most of the tax cuts would flow to families with incomes above $200,000.”
A 2018 Tax Policy Center analysis found about 9% of households would benefit from a repeal of the cap, and more than 96% of the “tax cut” would go to 20% of households with the highest incomes.
In New Jersey, repealing the SALT cap has at least some bipartisan appeal. In February, for example, state Sen. Joe Pennacchio, R-Montville, introduced a resolution urging Congress to reinstate unlimited SALT deductions.
However, proponents of the cap repeal may not have an ally in the White House. When asked about eliminating the deduction limits, White House Press Secretary Jen Psaki said doing so “would cost more money.”
“If Democrats want to propose a way to eliminate SALT – which is not a revenue raiser, as you know; it would cost more money – and they want to propose a way to pay for it, and they want to put that forward, we’re happy to hear their ideas,” Psaki said in a briefing at the beginning of April.