Obama econ adviser: Dems' SALT cap change is worse than I thought

AP Photo/Paul Sancya

As Glenn Reynolds likes to say, they told us that voting for Donald Trump would mean Congress would pass big tax breaks for the rich — and they were right! Democrats have spent the last four years complaining about Trump’s 2017 tax cuts and insist they want the rich to pay their fair share. Their latest change to Joe Biden’s Build Back Better plan imagines that most millionaires have overpaid.

But don’t ask me … ask Barack Obama’s economic adviser Jason Furman:

Of course, this is by design, and it’s getting pushed by blue states that impose the highest tax burdens in the country. The new-ish proposal raises the deduction cap from state and local taxes (SALT) from $10,000 to $72,500. Now … which brackets of earners pay more than $10,000? $20K? $40K? Hint: it ain’t the middle or working classes, not even in New York or California.

This didn’t come from the RNC, Heritage, or Cato, or any other ideologically oriented think tank. The data comes from the Democrat-run House Budget Committee and was published by the non-partisan Tax Policy Group, as Fox News reports (via the Bongino Report):

The so-called SALT deduction cap, which is poised to sunset in 2026, limits the amount of state and local taxes that Americans can deduct from their federal taxes to $10,000. Centrist Democrats have been pushing for months to include a full repeal in the president’s $1.75 trillion “Build Back Better” plan, but have faced opposition from left-wing lawmakers.

Under the latest proposal currently being considered by the House Rules Committee, the deduction cap would rise from $10,000 to $72,500 for five years (it would be retroactive to 2021). The measure would then extend the cap through 2031.

The analysis is certain to exacerbate intra-party fighting between progressives and moderates over what to do about the limitation, as temporarily eliminating it would require Democrats to vote for a policy that disproportionately benefits wealthy Americans living in blue coastal states.

We’ll get back to the BBB reconciliation fight in a moment. The reason that Democrats tossed this into the mix is because the Trump cap on SALT deductions has made Democrats very uncomfortable in deep-blue states with high state income tax rates. While state and local taxes remained entirely deductible from federal income taxes, top-taxing states in 2019 data like New York, Connecticut, Hawaii, Vermont, and Minnesota — with California coming in 9th — could keep their tax burdens high and not suffer much political fallout. Now that taxpayers in these states can only deduct the first $10,000 and remain on the hook for the rest, suddenly high taxes aren’t anywhere near as popular.

That’s why Democrats have promised to repeal it ever since, while claiming that their higher cost of living puts their middle classes at risk of the cap. The TPG data shows that to be utter nonsense. It’s the high-income earners who benefit most because they get soaked the most from the tax regimes in Democrat-run states. Lifting the cap tilts most of the tax savings in the entire BBB to the wealthy. As it turns out, capping the SALT deduction at $10,000 may have been the most progressive tax change in a long time — and it was enacted by Republicans.

Not only does this make the BBB regressive, it actually makes it harder to claim deficit neutrality, as the Committee for a Responsible Federal Budget accurately predicted:

The latest version of the Build Back Better Act being considered by the House Rules Committee would increase the state and local tax (SALT) deduction cap from $10,000 to $72,500 for five years (including retroactive to 2021) and then extend that cap through 2031. This proposal would cost roughly $300 billion through 2025, with roughly $240 billion going to those making over $200,000 per year.1

Though this increase in the SALT deduction cap would be less costly than full repeal, it would still cost more than almost any other part of Build Back Better with just the child care subsidies and the combined costs of all clean energy tax credits costing more. The benefits would also accrue disproportionately to high earners. While those in the middle of the income spectrum would receive an average tax cut of roughly $20 per year, the highest earners would enjoy over $23,000 per year in tax cuts from this provision. According to estimates from the Tax Foundation, roughly 80 percent of the benefit from this increased cap would go towards households making more than $200,000.

That’s not the “middle class,” let alone the “working class.” The 90th percentile of household income in the US for 2021 is estimated to start at $201,052, meaning 80% of the benefits will accrue to the top 10% of households by income. So much for the “progressives,” eh? Anyway, this puts a $300 billion hole in Democrats’ claim that the bill will have “zero cost,” a risible claim in the first place, but also its pretensions to deficit neutrality. Furman thinks this can be fixed through other tax hikes; follow his Twitter thread for his suggestions.

One has to wonder, though, whether Democrats even will bother any longer. Some progressives — notably Bernie Sanders — have objected entirely to the inclusion of any SALT adjustments, let alone this regressive and costly nightmare. Adding this provision makes a CBO score of deficit neutrality even more unlikely than before. With Joe Manchin all but calling a halt to consideration of the BBB as inflation spirals upward, the negotiations over BBB are looking more and more like performance art than legislating.

Democrats that included this regressive money drain aren’t serious about passing the bill. They just want to be seen posturing for a SALT cap repeal so they can get let off the hook for Democrats’ high-tax policies in deep blue states. Their tax policies aren’t the only thing regressing in the Democrats’ caucuses.