A new report from ITEP Provides policy recommendations to amend the US $ 10,000 Federal Withholding Tax Cap for State and Local Taxes (SALT) signed by President Trump under the Tax Cuts and Jobs Act.
Since the SALT cap is primarily a constraint on tax deductions for the richest 5 percent of Americans, the best option is to leave the cap unchanged or replace it with another provision that more broadly restricts tax breaks for the rich, without going to specific states like that SALT. aim cap does. ITEP deployed such a proposal earlier this year. Other options to change the SALT cap will reduce revenue that could be used for other purposes in the upcoming reconciliation package.
But Congress can at least limit the damage by changing the SALT cap, rather than lifting it. The ITEP report offers three options to limit the scope of the SALT cap, and each would cost less than a third to lift.
The SALT cap wasn't a great idea, but it doesn't pick it up either
The Republicans who drafted the Tax Cuts and Jobs Act (TCJA) don't deserve applause for capping SALT deductions. You could have eliminated or reduced any number of special regulations and loopholes in the tax law, but opted for the SALT deduction as it is more important in states with higher taxes, which are usually democratic states. Obviously, this is not a fair or sensible way of writing tax laws.
But simply lifting the SALT cap is not a solution. We estimate that if Congress lifted the SALT cap for 2022, 85% of the benefits would go to the richest 5% and 61% of the benefits would go to the richest 1 percent.
So why are some Democrats in Congress determined to lift, or at least limit, the SALT cap? Opponents of the SALT cap make at least two different, somewhat contradicting arguments.
They argue that the SALT cap harms the middle class. Representative Tom Suozzi (D-NY), in a opinion Earlier this year, he and his colleagues said that he would “advocate restoring the SALT withdrawal and highlighting the middle-class families wrongly injured by the cap”.
At other times, they argue that by capping deductions for state and local taxes, the cap pushes high-income people out of higher-tax states like New Jersey and New York. In one (n interview Speaking in July of the SALT cap, Rep. Suozzi said, “When wealthy people leave our states, leave our cities, leave our counties to go elsewhere, they take the revenue that goes into our households with them. It makes it much more difficult for our cities and our states and our counties to survive. "
In other words, opponents of the SALT cap claim that they want to keep taxes low for the middle class, but also that they want to keep taxes low for the rich.
None of these concerns are supported by data. The SALT cap has little impact on middle-income people and there is no evidence that its impact on rich people will cause them to move.
As can be seen from the estimates that can be downloaded from the ITEP report, most of the benefits of lifting the SALT cap would go to the richest 5 percent of residents in each state and District of Columbia. The richest percent of the population would get the most benefits in all but four states.
Almost all taxpayers among the bottom 80 percent of Americans are unaffected by the SALT cap because they either claim the standard deduction instead of individual deductions, or because they claim less than $ 10,000 in deductions for SALT.
As for the SALT cap, which causes rich people to leave high-tax countries in significant numbers, there is no evidence to support this. The most extensive research points out that it is very rare for people with high incomes to move across state lines for tax reasons, and that very wealthy people generally move less than other people.
For lawmakers who still want to reduce the reach of the SALT cap, the ITEP report describes three different policy options that would each cost around $ 30 billion in 2022. A different goal is achieved with each option.
Members of Congress concerned about the impact of the SALT cap on middle-income people might advocate lifting the cap for those on incomes below a certain threshold.
Members concerned about rich people leaving states with higher taxes might prefer an option that allows taxpayers to deduct SALT if it exceeds a certain floor, although this would benefit almost exclusively the rich.
Legislators who want an easy-to-explain policy option might prefer a proposal that simply raises the $ 10,000 cap to a higher level.
The ITEP report examines each of these three approaches. It notes that a complete removal of the SALT cap would be less desirable than either of these options.
Read the report.