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© Reuters. SALT Break Would Erase Most of House’s Tax Hikes for Top 1%

(Bloomberg) — High-earning taxpayers would face much smaller tax hikes — or even cuts — if Democrats decide to restore the federal deduction for state and local taxes in legislation that’s now moving through the House.

The top 1%, those who earn at least $401,601, would see a tax rise that is less than half of what it would if there was no cap on how much they could write off if SALT were to be fully restored, data shows from the Tax Foundation.

Those individuals would see their after-tax incomes fall 1.9% under the House Democrats’ current tax bill accompanied by a SALT-deduction restoration, compared with a decrease of 5% if the $10,000 limitation on the write-off were not expanded.

With the inclusion of a larger SALT deduction, tax cuts would also be possible for other taxpayers earning in the top 5 percent. The data shows that taxpayers who earn $165,181-$401,600 would see their incomes increase 0.9% with an uncapped SALT deduction. This compares to 0.3% before tax without SALT relief.

These figures reveal a crucial debate within the House Democrats about how to fix the tax cut that is politically significant for residents of Democratic strongholds like New York, New Jersey, and California. The House Ways and Means Committee passed an economic bill that included tax. However, it did not include any plan to deal with SALT. Instead, Democratic leaders left the matter up for negotiation.

This plan, which is part of a larger, $3.5 billion tax and spending bill, calls for several tax hikes. These include a rise in the top rate of income to 39.6% (from 37%), a surcharge on millionaires, as well as higher capital gains rates for those who have received investment proceeds. There are also a number of tax changes for corporations.

Expanding the SALT deduction, which was restricted in President Donald Trump’s 2017 tax law, has proved to be one of the most controversial issues for House Democrats. The tax cut will be primarily for high-earning households. Progressive lawmakers want to increase spending on low-income households.

Several House Democrats, including New York Representative Tom Suozzi, have said they won’t support the tax and spending bill unless it expands the SALT break. These lawmakers claim that Republicans unfairly targeted their constituents in 2017’s tax law. They also believe that restrictions on deductions harm middle-class taxpayers, and cause residents to flee their state.

‘Meaningful Relief’

“We continue to work among our colleagues and the Senate to undo the short-sighted capping of SALT by Republicans,” Suozzi, House Ways and Means Chairman Richard Neal and Representative Bill Pascrell said in a joint statement this week, saying that House Speaker Nancy Pelosi was involved in the effort. “We are committed to enacting a law that will include meaningful SALT relief that is so essential to our middle-class communities, and we are working daily toward that goal.” 

Critics include both progressives like Representative Alexandria Ocasio-Cortez and Republican lawmakers. According to Brookings Institution data, 57% of SALT cap repeal benefits would be distributed to the highest earners. This is an average value of $33,100. Restoring the full SALT deduction would cost the U.S. Treasury $88.7 billion in revenue for 2021 alone, according to the Joint Committee on Taxation, Congress’s nonpartisan scorekeeper.

The bill will include a two year suspension of SALT. This is being discussed by House legislators. The Democrats are also considering increasing the $10,000 cap rather than eliminating it completely.

The Joint Committee on Taxation said that under the current House proposal, which doesn’t include a change for SALT, that those earning $1 million or more would pay an average tax rate of 37.3%, compared with 30.2% under current law. People earning between $50,000-$75,000 will pay 12.2%, rather than the 13% that they currently pay.

©2021 Bloomberg L.P.

 



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