As we’ve previously discussed, Joe Biden’s massive “Build Back Better Act” (or “Build Back Broke” if you prefer) is pretty much dead in the water, at least in its original form. But there are still discussions taking place about a “barebones” version of the bill that might win the approval of Shadow President Joe Manchin and Queen Kyrsten Sinema. Even if they manage to put something together that might pass, it will once again be a proposal that satisfies almost nobody and will leave the progressive wing of the Democratic party seething over the lack of revolutionary changes included in it. One item that reportedly is already heading for the cutting room floor is the proposal to increase the cap on deductions for state and local taxes (SALT), an item that had been pushed as a priority for Chuck Schumer. And you can thank the usual (short) list of suspects for the proposal being dropped. (The Hill)
Senate Democrats say a proposal to raise the cap on state and local tax (SALT) deductions, a top priority of Senate Majority Leader Charles Schumer (D-N.Y.), is likely to be cut from the revised Build Back Better Act.
Senate Democrats who were involved in negotiations over the bill before Sen. Joe Manchin (D-W.Va.) blew it up last month say there’s simply not enough room for the expensive tax change, which Republicans argue would benefit wealthy suburban households in blue states.
“Yeah, I think that’s dead,” said one Democratic senator, who requested anonymity to summarize early discussions about changing the bill to win Manchin’s support.
One of Manchin’s red lines that he simply will not cross is a demand to keep the total cost of the bill below the $2 trillion mark, so at least some of this spending boondoggle will have to be paid for somehow. The SALT cap increase would slash a lot of revenue out of the package, shoving the “trimmed down” bill over that line. (Yes, we have apparently reached the point where two trillion dollars in unfunded spending is considered to be “trimmed down.”)
This entire debate has played out like something taken from a Bizarro World version of Congress. Usually, it’s the Republicans arguing in favor of people paying lower tax rates while the Democrats want to tax everything that doesn’t move quickly enough to evade them. But when it comes to the SALT deductions, we’re seeing the exact opposite.
The way that SALT deductions work is fairly basic. Up to a certain limit, taxpayers can claim the money they pay for state and local taxes as a deduction on their federal taxes. If you live in a state with low tax rates and/or don’t make a lot of money, you generally won’t come anywhere near the cap so the deduction is essentially automatic. But if you happen to live in a state with both high property taxes and high state sales or income taxes (but not both), you can wind up missing out on some of those deductions if you make a lot of money.
Guess which states fall under that general umbrella of high taxes and higher income rates? The blue states like New York and Massachusetts, just to name two of them. The current cap doesn’t impact people of modest means even in those states, however. In order to be shelling out more than $10,000 in SALT expenses (the current limit), you need to be raking in at least $150K per year, which is three times the median family income in the country.
That’s the reason Chuck Schumer and the Democrats have been fighting so hard to raise the cap to $80K. It’s not to help poor or middle-class workers in the heartland. It’s a plan to ease the IRS’ bite on wealthy people in states where they control the state and local government (and where they set the tax rates). And those same people also tend to be wealthy donors to political campaigns, including those of Democrats in those states. The picture should be clearing up nicely for you now.
This maneuvering by Senate Democrats puts the lie to their claims to want to “tax the rich,” as Bernie Sanders likes to say. They want to tax specific rich people who tend to more often vote Republican because the GOP favors lower taxes. But this SALT deduction loophole works in the opposite direction, hence the effort to raise the cap. And now, the plan appears to be yet another failed initiative to toss on the pile along with the rest of the things that Joe Manchin has clobbered.