The elimination of state and local tax deductions meets full denial of the Democratic Party
Tax Reform: What do you call a tax break that delivers 88% of the benefits to upper-income families and subsidizes rich states at the expense of poor ones? If you’re a Democrat, you call it a sacred cow.
One provision of the Republican’s tax-cutting plan that has drawn intense opposition from Democrats is the elimination of state and local tax deductions for those who itemize.
Autoplay: On | OffRep. Nancy Pelosi said it was “an insidious effort to raise taxes on middle class families … across America.” Sen. Ron Wyden said that “hardworking middle-class folks are not going to appreciate Congress double taxing them.” New York Gov. Andrew Cuomo called it “a pure tax increase.”
So what is it that Democrats are valiantly trying to protect?
This SALT deduction, as it’s sometimes called, will cost the federal government $1.8 trillion over the next decade, according to the Tax Foundation.
And the benefits go almost entirely to upper-income families.
Fewer than 22% of tax filers even claim the state and local tax deduction, and the vast majority of these are higher-income families. While 78% of those with incomes above $200,000 claim the deduction, just 7% of those making between $30,000 and $40,000 do. For most taxpayers, the standard deduction is more valuable.
In addition, because the wealthy pay more in state and local taxes, and are taxed at higher rates at the federal level, the value of this tax break sharply increases with income.
The Joint Committee on Taxation calculates that for those earning more than $200,000, the SALT deduction cuts their federal tax bill by an average $6,295. For those with incomes of between $100,000 and $200,000, it’s just $857. Those earning from $30,000 to $40,000 get an average of $93 off their federal tax bill.
As a result, 88% of the $1.8 trillion cost of this tax break goes to the 10% of families with incomes above $100,000.
In other words, this is one hugely regressive tax break.
And since the GOP plan would nearly double the standard deduction, the cost of getting rid of the SALT tax break will be even more concentrated among upper-income families.
So why are Democrats so intent on keeping it?
To understand that, you also have to understand that the benefits of the SALT deduction are heavily skewed toward wealthy high-tax states, for the simple reason that the more someone pays in state and local taxes, the more they can deduct from federal income taxes.
In fact, just seven states — California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, and New York — account for more than half the deduction’s cost, according to the Heritage Foundation. California alone is responsible for almost 20%.
Not only are these high-tax states, but they all just happen to be heavily Democratic. (Hillary Clinton had an average 21.6-point margin of victory in these seven states.)
In effect, then, the SALT tax break has turned into a massive federal subsidy of profligate liberal states, paid for by fiscally conservative states.
That’s why Democrats are so determined to keep it. Not because they care about working class families, but because they don’t want to see their rich friends who live in deep-blue states get hurt.