SALT Cap Repeal Boon to Wealthy

In December 2019, the House passed the “Restoring Tax Fairness for States and Localities Act” by a 218 to 206 margin.   The bill would eliminate the $10,000 limit on State and Local Tax (SALT) deductions that was put in place by the 2017 tax bill for 2020 and 2021 for taxpayers who itemize their tax deductions.  It also would raise the top tax rate from 37 percent to 39.6 percent. Once fully implemented in 2020 and 2021, the Bill would yield large benefits to high-income earners, despite the hike in the top tax rate.

Key Points:

  • Those earning more than $1 million annually would see the largest tax cut, averaging $21,451.
  • More than 90 percent of taxpayers would see no effect from the bill.
  • The average tax cut for taxpayers earning under $200,000 would be just $37.

Economist Corner:

Budgetary Gamesmanship: Bill “pays for” two years of tax cut with six years of tax increases.

The “Restoring Tax Fairness for States and Localities Act” doubles the cap on SALT deductions to $20,000 for married individuals in 2019 and removes the cap entirely in 2020 and 2021. Additionally, the bill increases above-the-line deductions for teachers and establishes new deductions for first responders. To pay for this, the bill raises the top marginal tax rate to from 37 percent to its pre-TCJA level of 39.6 percent for six years.  This means “paying for” a two-year tax cut with six years of tax increases.

Expected Long Run Impact is likely an Increase in long run the Budget Deficit

Though the bill removes the SALT cap for just 2020 and 2021, the intention of the bill’s creators is to make it permanent. This is done by passing “extenders” of tax cuts that are due to expire.  Usually these so-called “tax expenditures” are extended in perpetuity, their “official” expiration is only part of budget accounting tricks.  In each year where the bill takes full effect, the tax cuts for the high-income taxpayers are three times the offsetting tax increases. Therefore, in the long-run the changes proposed in the bill are unlikely to be revenue neutral but add to the deficit and the national debt.

Main Impact is to Cut Taxes on the Rich Living in High-Tax States and Raise Them on the Rich Living in Low-Tax States

The removal of the SALT cap serves as a transfer to high-income earners in high-tax states, where they would be able to reduce their federal tax burden by deducting state taxes. But, raising the top marginal rate raises taxes for all high-income earners, regardless where they live. On a revenue neutral basis, which is what the bill purports to be, the main effect of the bill is simply to transfer money from rich people in low-tax states to rich people in high tax states.