Pelosi’s SALT Scheme

House Democrats raise a deduction that goes mainly to high-tax states

WSJ editorial.

"Don’t Democrats want to raise taxes on the rich? We seem to recall this—correct us if we’re wrong—but then how are they going to explain their expansion of the state-and-local tax deduction for largely affluent taxpayers in mainly Democratic states?

We realize that last point answers the question. This is a giant political payoff to House Democrats from New York, New Jersey, Illinois and California so they vote for the Sanders-Pelosi $4 trillion tax and spending bill. As a raw exercise in political and economic hypocrisy, this is one for the ages.

Democrats didn’t want to let this embarrassment rot in the sun for too long, so they kept SALT out of the House Ways and Means tax measure. Instead, they’ve now stuffed it into the reconciliation bill at the last minute, literally hours before a vote, with no press conference or fanfare, much less debate.

House Democrats are proposing to raise the annual SALT deduction cap to $72,500 through 2031. Republicans had limited the previously unlimited deduction to $10,000 in their 2017 tax reform on the sensible grounds that it was an unfair subsidy for bad fiscal policy in high-tax states. If you can’t deduct from your federal tax liability what you pay in New York (top income-tax rate: 14.8%), the costs of living in Gotham City go way up.

The SALT scheme is even more devious than it sounds. The SALT expansion costs an estimated $291 billion through 2025, according to the Penn Wharton Budget Model. But the GOP’s $10,000 SALT deduction cap is set to expire in 2026. By extending their expansion through 2031, Democrats can pretend their plan saves money in the 10-year budget window.

The scheme is a screaming advertisement for tax unfairness. In 2017 before the GOP imposed the $10,000 cap, New York, Connecticut, New Jersey, California, Massachusetts and Illinois were among the SALT deduction’s biggest winners, with filers writing off an average of $17,295 from their federal tax bills. Taxpayers in states like Texas and Florida with no personal income tax benefit far less.

The SALT benefit accrues mainly to the affluent. Almost all benefits would go to taxpayers in the top 20% of the income scale. The Penn Wharton modelers estimate that only 9% of taxpayers in the bottom 80% of tax filers would get a tax cut. But some 83% of taxpayers in the top 0.1%—folks making more than $2.5 million—would get one, averaging $16,195. 

The Tax Foundation’s model gets similar results, with 87.6% of taxpayers earning more than $1 million getting a tax cut. Filers earning more than $250,000 would get 70% of all the tax savings from the Pelosi SALT scheme. This is simply an income redistribution ploy to buy the votes and campaign dollars of the affluent residents of big cities and suburbs.

But wait, it gets worse. By extending their SALT expansion through 2031, Democrats are also making it harder for Congress to extend the other 2017 tax provisions that expire (or begin to) after 2025. That includes the change in tax rates, expensing for business and the higher death-tax exemption, among many other expiring provisions. Because lifting the cap saves money after 2025, a GOP Congress would have less money to extend these tax cuts.

Bernie Sanders is a rare progressive objecting to this SALT trick, but it isn’t clear he can stop it in the Senate. In any event, the next time a Democrat rises to intone about “tax fairness,” tell him to eat salt."