Democrats Push for Massive Tax Cut for the Richest, Brookings Says

September 9, 2020 Updated: September 9, 2020

WASHINGTON—Democrats are pushing to lift the cap on the federal tax deduction for state and local taxes (SALT), but a Brookings Institution study says this would be a handout to the rich.

“Lifting the cap on the SALT deduction would massively favor the rich, with most of the benefit going to the top 1 percent,” Richard Reeves and Christopher Pulliam from the Brookings Institution wrote in a recent report.

House Democrats passed the $3 trillion HEROES Act in May. Buried in the 1,815-page relief bill is a provision that would eliminate the limitation on the SALT deduction for 2020 and 2021.

Democrats argue that lifting the cap would provide relief to people hit hardest by the virus, especially in devastated cities such as New York.

Under the old tax code, individuals who itemized their deductions were able to deduct all their SALT against their federal taxable income. The 2017 Tax Cuts and Jobs Act (TCJA), however, limited individual’s deduction for SALT payments to $10,000 a year ($5,000 for a married person filing a separate return). Any state and local individual income or property tax payments in excess of that amount are no longer deductible by individual taxpayers.

Blue state Democrats believe the SALT cap is unfair to their residents. Blue states, especially those with higher individual income and property tax rates, objected to this cap and even tried to create tax maneuvers to avoid this limitation.

Republicans, on the other hand, argue that the SALT deduction mostly benefits wealthy individuals and is unfair to residents in lower-tax states. They argue that lifting the SALT cap forces people in low-tax states such as Tennessee and Texas to subsidize high-tax states such as California and New York.

“The main argument from some on the political left for the SALT deduction is that it encourages states to spend more by making it easier for them to tax more,” the Brookings report said.

“But if the goal is for the federal government to provide additional support to state and local governments, far better to do so directly, rather than by the roundabout route of offering a tax break to the rich.”

Almost all benefits of repealing the $10,000 SALT cap would go to the top quintile, with the top 1 percent getting an average tax cut of $33,100 and 0.1 percent receiving nearly $145,000, according to Tax Policy Center estimates.

Lifting the SALT cap would give essentially no benefit to the middle class, contrary to what Democrats have argued. Only 4 percent of the benefit would go the middle class, “for an average annual tax cut of a little less than $27,” the report stated.

However, Senate Minority Leader Chuck Schumer (D-N.Y.) said in July that he would make it a priority to permanently remove the SALT deduction cap if Democrats win the Senate majority in 2020.

“I want to tell you this: If I become majority leader, one of the first things I will do is we will eliminate it forever,” he said during a press conference. “It will be dead, gone, and buried.”

Schumer, House Speaker Nancy Pelosi (D-Calif.), and Joe Biden’s presidential campaign didn’t immediately respond to requests by The Epoch Times for comment.

“At best, the SALT deduction is a warped way to do social policy; at worst, it is a politically-motivated handout to the richest people in the richest places,” the report stated.

“Rather than seeking to remove the cap on the deduction, policymakers would do better to consider steps towards the removal of the deduction itself.”

The U.S. Treasury Inspector General for Tax Administration predicted in 2019 that the SALT cap would prevent nearly 11 million taxpayers from deducting $323 billion in state and local tax payments from their federal tax returns.

“Most of the benefits of the TCJA went to the top fifth, and 20 percent went to the top 1 percent. But lifting the SALT cap would be much more favorable to the rich—with almost three times as much of the benefit going to the top one percent,” the report stated.

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