Moneybox

Democrats Should Keep Soaking New York and New Jersey on Taxes

Chuck Schumer talks on his phone while walking down stairs outside the U.S. Capitol
I’m sorry, Chuck, but it’s true. Win McNamee/Getty Images

Democrats usually make it a point to oppose tax breaks for the wealthy. But in recent years, there’s been one particularly conspicuous exception: the deduction for state and local taxes.

Long cherished by the relatively well-off denizens of high-tax blue states such as New York and New Jersey, the so-called SALT deduction was dramatically shrunk by Republicans as part of their 2017 tax bill, which temporarily capped its value at just $10,000 per couple. A group of Democratic lawmakers, including Senate Majority Leader Chuck Schumer, as well as a few stray House GOP members, have been on a mission to restore it ever since. According to Axios, the band of lawmakers is currently pressuring the White House to lift the cap early, well before its scheduled expiration in 2026.

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Schumer and his comrades are thinking exactly backward. Democrats shouldn’t be attempting to undo the SALT cap ahead of time. Rather, a wiser move would be to make it permanent, and use the money to fund much more important priorities.

The key thing to keep in mind about the SALT deduction—which lets taxpayers deduct state and local income, sales, and property taxes from their federal return—is that it is highly regressive. While many middle-class households did claim it before the Trump administration’s tax reforms, about 61 percent of the benefits went to taxpayers earning $200,000 or more per year. It was primarily a tax preference for upper-middle-class professionals and 1 percenters, particularly on the coasts.

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The SALT deduction’s defenders argue that it indirectly helps the poor and working class, by making it easier for blue states to pay for public services with high taxes on their wealthier residents, who might otherwise consider fleeing to low- or no-tax locales like Texas and Florida—especially in the post-COVID world of Zoom commutes. Many Democrats also understandably groused that Republicans capped the deduction to pay for a tax reform bill that largely benefited the rich in other states, turning it into a transfer from wealthy East Coasters and Californians to wealthy Sun Belters that simultaneously attacked blue state tax bases.

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Those arguments aren’t objectively wrong—though they should be taken with a grain of, well, salt. It’s not clear based on the mobility data we have whether the state and local cap actually turned a significant number of Americans into tax refugees. And while the deduction did make it easy for blue states to impose progressive income taxes, they also subsidized the high local property taxes in states like New Jersey that are essentially the price of admission for the exclusive public schools.

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The bigger issue is that, whatever its virtues might once have been, bringing back the SALT deduction doesn’t make much sense as a Democratic priority. For starters, it’s expensive. An analysis by Congress’ Joint Committee on Taxation reportedly found that scrapping the limit would cost $357 billion over five years, making it a fairly large budget item that would eat up resources if Democrats want to actually pay for their agenda. And on a philosophical level, I cannot begin to think of an argument that would justify lavishing that money on the home-owning gentry of Essex or Rockland counties when many Democrats have opposed ideas like student debt forgiveness or free college on the grounds that they would disproportionately help the upper-middle class. Either of those ideas would be a better way to cater to America’s professional and managerial class than giving Jersey millionaires a break on their taxes. And if Democrats specifically want to subsidize state-level public services, they could just do that directly, for instance by increasing the federal share of Medicaid funding.

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Democrats don’t actually have to do anything in order to make the SALT cap disappear. Like much of the GOP’s tax bill, it’s scheduled to sunset in 2026. But waiting and allowing that to happen would also be a mistake. Blue state residents have already begun adjusting to life under the cap, and keeping it in place, rather than allowing it to disappear, could pay for a significant chunk of their ambitions.

The fact of the matter is that Democrats in Washington have a lot of things that they would like to spend money on these days—a big infrastructure push, an ambitious anti-poverty agenda, and a splurge on high-tech research aimed at competing with China, among other items. And to pull it off, they’ll likely have to raise taxes.

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There’s really just no way around it. Some reasons are political. West Virginia Sen. Joe Manchin, the god-king of coal country who holds a veto over the party’s entire wishlist, says he’s getting antsy about the deficit and wants the party to start financing its to-do list with tax hikes. Others are procedural. The budget reconciliation process, which lawmakers are relying on to avoid Senate filibusters, more or less requires lawmakers to pay for any permanent programs they’d like to pass. But one way or another, Democrats will have to scrounge and use valuable political capital funding their legislation, and every dollar of revenue is going to count.

There are some obvious ways Democrats can raise revenues, which they’re already exploring: Hiking the corporate rate (which Republicans slashed in 2017 from 35 to 21 percent), increasing capital gains taxes, and upping the top rate on incomes are all candidates. But keeping the SALT cap in place, or at least a version of it, also makes sense. First, it could bring in a significant amount of money: According to the Congressional Budget Office, it would raise more than $120 billion per year starting in 2027. That cash would go a long way toward making permanent the massive but temporary expansion of the child tax credit contained in the Biden administration’s COVID relief bill, which would be a historic anti-poverty achievement. Second, the cap is already there, so they wouldn’t have to raise taxes from where they are today. They could even strike a compromise by increasing the cap to, say, $20,000 for a couple, rather than scrapping it entirely, and still provide funding for other items.

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Would this be difficult politically? Maybe. It might be hard to do while strictly sticking to Joe Biden’s pledge not to raise taxes on anybody earning under $400,000 per year. But on the other hand, it’s hard to see how Republicans would effectively attack Democrats for keeping a tax change in place that they themselves originated (though I wouldn’t put it past them to try). Democrats and the Biden administration should absolutely pass on removing the SALT cap, and they should think hard about keeping it on. The yard owners of the tri-state area will complain, but they’ll survive.

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