Tax relief for real people and employers should not be held up by SALT concerns.
Tax relief for real people and employers should not be held up by SALT concerns.
W estchester County in New York is in many ways the poster child for the State and Local Tax (SALT) debate holding up the signature GOP Ways and Means tax package in Washington right now.
The northern half of this Gotham suburb is represented by a Republican, and the southern half by a Democrat. These congressmen probably don’t agree on much, but they are each very certain the good people of Westchester County were harmed by the 2017 Tax Cuts and Jobs Act (TCJA), and in particular, its cap on the SALT deduction of $10,000.
But that just isn’t the case. And if it’s not true in Westchester, it’s not true in any other “SALT counties” anywhere else, be they in New York, New Jersey, or California.
To start with the bottom line, the TCJA was very good to the people of Westchester County. Those making between $50,000 and $75,000 per year have received an average income-tax cut of $800. Those making between $75,000 and $100,000 got a tax cut of $900. Those in the $100,000 to $200,000 range saw their taxes reduced by $800. Only those making more than $200,000 are paying about the same as before.
But even that doesn’t tell the whole story. Marginal-tax rates went down across the board, so residents of Westchester County get to keep more of their own money when they get a raise or take a second job. The child tax credit doubled from $1,000 to $2,000. Small-business owners in Westchester County got a new deduction for up to one-fifth of their business profits.
TCJA was a tax cut for 85 percent of Westchester County households, and a tax simplification for the other 15 percent. Almost no one paid higher taxes.
“Sure,” a critic might say. “I suppose no one is worse off and most people got a tax cut, but what about SALT?”
Prior to the TCJA, most residents of Westchester County did not successfully claim a SALT deduction. A majority of the county’s tax-filing households (52 percent) claimed the standard deduction, which can only be used if you’re not trying to deduct SALT. Another 14 percentage points were stuck in the Alternative Minimum Tax (AMT), a parallel tax code that zeroed out SALT deductions entirely. Those successfully able to claim SALT and making less than $100,000 per year had an average SALT deduction of less than $10,000.
After TCJA, the standard deduction percentage of Westchester County rose from 52 percent all the way to 81 percent. Presumably, these taxpayers were not harming themselves by choosing the standard deduction over the itemized deduction form with its SALT line item.
The AMT was virtually repealed by the TCJA. That means 66,000 Westchester County families who used to be trapped in the $0 SALT deduction AMT were now moved into a $10,000 SALT deduction TCJA world.
That’s not all. Before TCJA, it was very common for Westchester County taxpayers to have to pay federal income tax on their New York income-tax refunds; 109,000 families did so the last year before TCJA. Thanks to the tax cut, that number has now been reduced to 11,000.
Perhaps after all of this, you are shedding a tear for the $200,000-and-above households of Westchester County. After all, their federal income tax on average stayed flat. But that overlooks a critical point on SALT: Almost none of these families were successfully claiming a SALT deduction. Seventy-five percent of them were in the AMT, which I must reinforce had no SALT deduction permitted whatsoever. Many of the rest were subject to the Pease phaseout of itemized deductions, which limited SALT for high-income earners.
These households benefited from lower marginal-income-tax rates, the small-business tax cut, and the $,2000 per-child tax credit. Financially sophisticated households with tax expertise also sought out SALT cap workarounds for non-wage income, a common tax-planning tool in almost every state that transfers the SALT deduction off the 1040 and onto partnership and S-corp returns, where it can be utilized in full.
In 2025, the individual provisions of the TCJA must be reauthorized by Congress. At that time, if SALT-concerned members think they have a better way to design the SALT deduction, they should come up with a plan and bring forward their idea. Fairness concerns they have raised include the fact that the SALT deduction has an inherent marriage penalty (it’s $10,000 for both married couples and singles), there’s no special relief for fixed-income seniors who have expensive property-tax bills, and so on. These are not unreasonable concerns, but they should not hold up common-sense tax legislation today.
So now that it’s been established that SALT counties got tax relief and/or simplification, and that concerns about SALT are exaggerated or lack context, let’s look at the Ways and Means tax package that SALT-concerned Republicans are holding up.
The Ways and Means package has three key features. First, it prevents millions of taxpayers from getting a tax form they’ve never gotten before called a “1099-K.” When a taxpayer sells used goods on Facebook Marketplace or receives cash via Apple Pay, they are supposed to get a 1099-K tax form detailing the gross dollars received (irrespective of whether they owe tax on these dollars or not). Prior to this year, the minimum threshold was $20,000 and 200 transactions per app, so only bona fide business owners generally received 1099-Ks. Starting in January, however, these thresholds plummet to $600 and 1 transaction, respectively. The Ways and Means tax bill keeps the legacy levels in place permanently.
Second, the Ways and Means bill preserves the full expensing, cost-recovery measures introduced by the TCJA. Businesses will be able to continue deducting in full all their business-property investments and their research expenses. Businesses that borrow in order to finance new investments won’t be punished with an interest cap. Smaller firms will be able to expense up to $2.5 million of business-fixed investment, up from $1 million today. As we’re fighting twin cold wars with China and inflation, it’s important that businesses be able to invest in jobs and equipment without a tax penalty for doing so.
Finally, the Ways and Means bill provides additional direct tax relief to the people of Westchester County. The standard deduction (renamed the “guaranteed deduction”) rises by $4,000 for married couples and $2,000 for all others. A married couple will pay no income tax on their first $30,000-plus of earnings, and that’s before accounting for the child tax credit’s additional tax-free earnings benefit. The percentage of families in Westchester County claiming this deduction instead of claiming SALT will rise by tens of thousands of households, making it a kind of backdoor SALT relief and a bridge to the 2025 reauthorization of TCJA. As it is, this boost to the standard deduction is a tax cut for 415,000 Westchester County families.
Like everything else in TCJA’s individual provisions, the contours of the SALT cap will be revisited in 2025. But in the here and now, tax relief for real people and employers should not be held up by SALT concerns.