Moneybox

The Galaxy-Brained Reason Democrats Might Pass a Massive Tax Cut for the Rich

WASHINGTON, DC - OCTOBER 21: Rep. Josh Gottheimer (D-NJ) speaks to reporters after a House vote to hold former Trump adviser Stephen Bannon in criminal contempt at the U.S. Capitol Building on October 21, 2021 in Washington, DC. The House voted 229-202 to hold Bannon in contempt for refusing to cooperate with the select committee investigating the January 6 attack. Nine Republicans voted with Democrats. (Photo by Anna Moneymaker/Getty Images)
This guy. Anna Moneymaker/Getty Images

It’s entirely possible that the Build Back Better Act will end up spending more money on a tax break for rich orthodontists in New Jersey than fixing American health insurance or curing child poverty.

But thanks to the magic of Congressional-budget scorekeeping, this same tax cut, while morally unjustifiable on its face, might actually raise money on paper, which Democrats could then use to “pay” for other parts of their agenda.

Confused? Welcome to the current debate over the state and local tax (or SALT) cap, which has dogged Democrats for months now as they have tried to negotiate over President Biden’s domestic agenda, and has now pretty thoroughly ascended into galaxy-brain territory.

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Currently, Americans can only deduct up to $10,000 of state and local taxes from their federal returns. Republicans imposed the limit in 2017 to help pay for Donald Trump’s signature tax cut, a move that infuriated upper-income Democrats in high-tax blue states, who felt they were being robbed to fund tax cuts for red states and the ultra-wealthy. The issue has been a parochial obsession for New York and New Jersey politicians ever since, a critical number of whom have vowed not to vote for any package without significant SALT relief. New Jersey Rep. Josh Gottheimer has literally been walking around with a pin that says “no salt, no dice” (because apparently we’re just leaning into bridge-and-tunnel stereotypes now).

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And the Northeasterners might get their way. On Tuesday afternoon, it was reported that lawmakers were considering an agreement that would lift the current SALT cap for five years, one of which would be retroactive.

The Committee for a Responsible Federal Budget finds it would cost the government about $475 billion in revenue over those five years, which would technically make it the single most expensive part of the legislation, if you don’t, say, count all of the various climate items as part of one single bucket. The benefits would overwhelmingly flow to upper-income taxpayers. It would also potentially turn the whole bill into a net tax cut for the rich.

SALT cap cost
Committee for a Responsible Federal Budget
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That’s in reality—and it’s why the Wall Streeters who commute from Gottheimer’s district want it so much. On paper, however, the move may actually look like a money-raiser. The reason why is that, currently, the SALT cap is set to expire in 2025. Instead of repealing it entirely, the Democrats would simply suspend the cap for a few years, then bring it back between 2026 and 2031, which would turn the move into a revenue-generator under Congress’ budget-scoring rules. Based on a quick think tank estimate, Richard Rubin of the Wall Street Journal reports that it could raise as much as $151 billion.

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Again, that’s all on paper. In reality, there is a chance the SALT cap never would have expired in the first place. Plus, the same lawmakers fighting tooth and nail to lift the SALT cap now would spend the next several years fighting to make it sure it never comes back if this plan goes through.

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So, on the one hand, Democrats may be contemplating a grotesque handout mostly to the rich. On the other, it could let them take advantage of the mother of all budget gimmicks to smooth out their spending plans.

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I want to be crystal clear here: Channeling $475 billion actual dollars toward SALT cap relief is a crappy use of real-world resources. Democrats often try to pretend that this is really a middle-class tax issue, but that’s just not the case. Yes, the deduction offsets property taxes for a lot of upper-middle-class homeowners in the New York metro region. But the left-leaning Institute for Taxation and Economic Policy calculates that, in 2022, 64 percent of the benefit of the repeal would flow to the richest 1 percent of American households, while 86 percent would go to the top 5 percent. Even in New Jersey, it’s mostly the very wealthy who benefit.

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The more sophisticated argument in defense of the SALT deduction is that, in theory, it allows blue states to fund more social services by raising taxes higher on their wealthy residents. But that may not be true in practice. (The Tax Policy Center concluded that “only a few” studies have found any effect of the deduction on how much money states raise or spend.) More importantly, instead of giving the wealthy a tax deduction in the hope that it will trickle down to more state-level social spending, it’d almost certainly be more efficient for Democrats to just, you know, spend money on poor people

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That said: If Democrats can’t agree on any other way to fund their agenda, and giving a tax cut to millionaires unlocks votes and magically raises a bunch of revenue on paper, you can kind of see the case for it, even if the whole thing makes you retch.

Still, this thing appears to be nowhere near a done deal. On the one hand, Sen. Bernie Sanders hates the agreement because it’s a handout to the rich.

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On the other, New Jersey Sen. Bob Menendez is unhappy about the remote possibility that the deal could actually raise taxes on his constituents.

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So who knows where this ends up. If Democrats did for some reason want to strike a compromise that provided middle-class relief from the SALT cap without also providing boat money for hedge funders, there are very straightforward ways to do it. They could double its value, or exempt families below $400,000 dollars from the limit. If they then extended the new, loosened cap for additional years or made it permanent, they might even be able to raise real-world revenue. It would leave a bunch of wealthy donors from Jersey pissed, sure, but it wouldn’t require the morally queasy compromise of passing a trickle-down tax cut for multi-millionaires that we’re all supposed to pretend will pay for itself.

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