After all the talk about how everything was infrastructure, and the reconciliation bill was going to transform America, Democrats are prepared to make the single largest item in the bill the restoration of a tax deduction that primarily benefits the wealthy.
Phil is right that it’s exactly the kind of budget gimmick that Joe Manchin said he wouldn’t stand for. It’s also contrary to what Democrats say they believe about taxes.
No matter what Democrats tell you about the Tax Cuts and Jobs Act (TCJA), Republicans’ 2017 tax reform, it did result in a tax reduction for Americans throughout income groups and in every congressional district. It also had modest positive effects on economic growth in general. According to the Tax Foundation’s Garrett Watson, a backward-looking study from the CBO in August of this year found that “the TCJA reduced federal tax rates for households across every income level while increasing the share of tax paid by the top 1 percent.” On top of all of that, the TCJA also simplified the tax-filing process by roughly doubling the standard deduction, which means tens of millions fewer Americans need to itemize on their returns.
Democrats can call it a “tax cut for the rich” all they want, but those results are not what you’d get if you were trying to cut taxes for the rich.
Restoring the SALT deduction, on the other hand, is predominantly a tax cut for the rich. The SALT deduction still exists under current law; it is merely capped at $10,000. The vast majority of Americans do not pay more than $10,000 in state and local taxes; therefore, they still receive the full deduction. The Americans who do are mostly wealthy and live in states with high property taxes. Nearly all of the benefit from repealing the SALT cap would go to the top 20 percent of income earners, and 62.5 percent of the benefit would go to the notorious one-percenters, according to a different analysis from Watson.
Howard Gleckman from the progressive Tax Policy Center wrote last week that Democrats’ SALT cap plans “may be Congress’s worst tax idea of the year.” His center’s analysis finds that the top 1 percent of households, i.e., those making $824,000 per year or more, would get a tax cut of about $35,000 in 2022. For the middle class, only 4 percent would get any cut at all, and it would average about $20.
According to press reports, not only will Democrats restore the SALT deduction, but they will make it retroactive. That means the IRS will be forgoing revenue it was planning to collect from high-income taxpayers at exactly the same time Democrats claim they want the IRS to crack down on high-income taxpayers for dodging taxes they already owe.
Democrats made this announcement while everyone’s attention is focused on Virginia, and it makes sense why. Restoring the SALT deduction undermines everything they claim to believe about taxation and makes their past attacks on Republicans look even more off-base than they already were.