A Wonky Tax Break for the Well-Off Is a Bigger Problem for Democrats Than You’d Think
Salt can be eaten in its edible form. mineral form, it’s used to dry out snowy highways; and in its tax form, SALT—the acronym for state and local tax deductions that disproportionately benefit well-heeled taxpayers—might sound like a topic bound to dry out conversations.
Even Sen. Bernie Sanders, a key player on negotiations concerning the SALT cap in the Democrats’ flagship $1.7 trillion social spending and climate Build Back Better (BBB) package, quipped that SALT does not excite most people on the Hill. “I thought she was the only person in the world who was concerned about SALT,” he told me, gesturing to another reporter, when I asked him for an update on SALT’s status.
But don’t be fooled. While Senate Democrats are struggling to pass BBB legislation, SALT debate may be the most fascinating thing happening in the Capitol. Whatever form the provision ends up taking could have major financial implications for taxpayers in high-tax states; huge electoral consequences for the Democrats who represent those states; and significant political fall-out for the party’s make-the-rich-pay-their-fair-share political messaging.
That’s because raising the cap on SALT deductions from $10,000 to $80,000, as prescribed in the House-passed version of BBB, would disproportionately help taxpayers rich enough to benefit from itemizing their federal tax deductions—which is to say, the richest fifth of Americans. The nonpartisan Institute on Taxation and Economic Policy’s November analysis found that the SALT cap increase would only benefit 20% of taxpayers and 34% of the benefits would go the richest 5.
It is unclear what the Democrats should do. Some Democrats, like Sen. Bob Menendez and Rep. Tom Suozzi, who recently announced a run for New York Governor, support raising the cap on SALT deductions as a means to reverse the effect of Trump’s 2017 tax bill, which led to tax hikes in blue states. Some, such as Rep. Jared Golden argue against raising the cap, arguing that it portrays Democrats as hypocrites. The second-most costly item in a bill to support American families, the SALT cap would be raised. This would allow for a tax relief for elite coastal residents.
The standoff leaves Democrats in a damned-if-they-do, damned-if-they-don’t bind: deliver a windfall to wealthy Americans or screw over Democratic states on the eve of a midterm election where Democrats’ narrow majorities in both chambers are at risk.
The tricky politics of raising the SALT cap—or not
Republicans established the $10,000 limit on SALT deductions to offset other tax cuts they made in 2017’s Tax Cuts and Jobs Act. The TCJA lowered corporate taxes from 35% to 21% while lowering individual tax rates. Because the TCJA nearly doubled the standard deductible, the main losers of the new $10,000 SALT deduction cap were well-to-do people in states with the highest property taxes—Democratic states, like California, New York and New Jersey.
Republicans argued that the federal government should not subsidize the progressive benefits that coastal blue states offer by allowing the states’ residents to deduct their higher SALT liabilities from their federal taxes. “My 29 million constituents in Texas are not interested in subsidizing bad governing decisions made in places like New York or San Francisco, and they shouldn’t have to,” Sen. John Cornyn, a Texas Republican, said at a December press conference.
Democrats in favor of raising the SALT cap argue that allowing taxpayers to deduct more state taxes isn’t a gift just for the rich. It’s a gift for middle-class wage-earners, like teachers or firefighters, who might have relatively high combined household incomes—say $200,000—but see much of their earnings wiped out by high costs of living in big metropolitan centers. For example, the median Hoboken home is worth $749,000 while Cheyenne’s is about $340,000. “Our cost of living is higher here, so our folks need to make more. They shouldn’t be punished and double taxed for it,” Rep. Josh Gottheimer, a New Jersey Democrat who refused to vote on the House’s version of BBB without a higher SALT cap, said earlier this month.
Some Democrats argue that failure to increase the SALT limit could impede the progressivism movement. What is their argument? The TCJA’s low cap could have the effect of driving high taxpayers out of high-tax states, which would reduce blue states’ revenue and, in turn, gut their ability to provide robust social policies, like tax credits for electric vehicles, and city and state-run universal pre-k and paid family leave programs. A higher SALT cap enables coastal blue states to be “laboratories for democracy” where progressive policies can be tested before they become federal law, one Democratic aides, granted anonymity to discuss sensitive negotiations, told TIME.
The hawkish Committee for a Responsible Federal Budget estimates that raising SALT’s cap will cost $275 billion in five years. That cost, some Democrats argue, is egregious considering that lawmakers already scrapped (free community college) or watered down (paid family leave) a slew of progressive policies in order to make the bill’s cost projection more appealing to centrist Senators Joe Manchin and Kyrsten Sinema.
“Our priorities should be making sure that families have affordable childcare, our priority should be making sure that we have paid family and medical leave and that it’s meaningful,” Sen. Michael Bennet, a Colorado Democrat, tells TIME. “To the extent that we’re spending money on a regressive tax policy, like SALT, I think that does diminish our ability to do those other things.”
No matter how you cut it, the politics of the SALT debate aren’t good for Democrats. Those in favor of raising the cap must, essentially, defend their decision to include a tax break for the relatively well-off in a bill that is being sold—by the President of the United States, no less—as a tool to bolster the middle class. Republicans have taken their cue from Republicans and are now open to attack on the GOP. With TCJA, “our Democrat colleagues railed against us,” Republican TIME was told by Sen. Pat Toomey (ranking member of Senate Banking Committee). “Now, with the first chance they get, they do this huge tax giveaway to their wealthiest supporters.”
Democrats opposed to raising the cap have to face the reality that this leaves their fellow Democrats vulnerable in 2022. Reps. Tom Malinowski of New Jersey and Mikie Sharrill from East Coast House were among the many East Coast House Democrats who campaigned for repealing the SALT limit. Their swing districts could be at stake if they fail to meet that deadline by 2022.
A slow-motion debate
Weary of under- or over-SALTing their preeminent policy package, the caucus has yet to agree on the tax measure, and Senate Majority Leader Chuck Schumer’s goal of voting before Christmas becomes less and less likely by the day. The updated draft of the bill that Senate Finance Committee Chairman Ron Wyden released Saturday contained no language on the SALT provision, instead reading: “PLACEHOLDER FOR COMPROMISE ON DEDUCTION FOR STATE AND LOCAL TAXES” under the SALT subhead.
Sens. Sens. The House’s $80,000 SALT cap could be eliminated entirely. Instead, the House would limit taxpayers to a certain income level to allow them to claim SALT deductions. A Democratic aide said that Sanders and Menendez currently consider maximum annual incomes somewhere between $400,000 to $550,000 for single-filers. Sanders favors the figure closest to the former. Menendez prefers the figure closer to it. The aide also notes that Menendez is pushing for the lower income.
Whatever the end cap, Republican fodder is fed by the debate that Democrats have fallen out with each other and their priorities. “It sounds like they’re conflicted,” Cornyn joked to TIME on Tuesday.
This may have been one of the rare occasions when he and Bennet can agree on something.
“The [expanded]Child tax credit [costs] $190 [billion] versus $275 billion for SALT,” says Bennet. “I do think that it raises the question about what our priorities really are.”