The House's SALT Cap Proposal Is Bad Policy and Bad Politics | Opinion

The tax bill passed by Republicans in 2017 mostly made our tax code worse, increasing the federal debt by up to $2 trillion and delivering the bulk of its tax cuts to corporations and the rich. But the bill contained one very good, very progressive provision: capping the State and Local Tax (SALT) deduction at $10,000 per household. Unfortunately, House Democrats just made a proposal that would compound the GOP tax bill's regressiveness: increasing the SALT cap and giving multimillionaires a $25,000 per year tax cut. The Senate must not follow their lead.

The SALT deduction has been around in some form for a long time, dating all the way back to the Civil War. It allows taxpayers to deduct what they pay in state and local income, property and sales taxes from their federal taxes. But not all taxpayers get to reap the benefits of the SALT deduction. Taxpayers must itemize their tax returns to be able to claim the SALT deduction—and only the richest taxpayers tend to itemize. Most taxpayers tend to take the standard deduction rather than itemize, unless they make at least $500,000 in a single year. And as one becomes richer, and consequently pays more in state and local taxes, the dollar benefit of the SALT deduction becomes larger.

Until the 2017 Republican tax bill capped the SALT deduction at $10,000, there was no limit on the amount that could be deducted. The cap amounted to a tax hike that applied almost exclusively to the richest Americans. It raises about $85 billion each year, 90 percent of which comes from the richest 10 percent of Americans.

But now a group of House Democrats from high-income states want to raise that cap. The latest proposal, included as an amendment to the House's Build Back Better plan, would allow the richest Americans to deduct $80,000 of their state and local taxes from their federal tax bill—more than the total earnings of most American families.

If Congress opts to raise the SALT cap by this amount, it will become the third most expensive piece of reconciliation bill, costing the federal government $300 billion in forgone revenue. That is nearly double the cost of the House bill's Child Tax Credit expansion proposal.

House Democrats Build Back Better press conference
WASHINGTON, DC - OCTOBER 20: U.S. Speaker of the House Rep. Nancy Pelosi (D-CA) speaks as she joins religious leaders during a news conference outside the U.S. Capitol October 20, 2021 in Washington, DC. Speaker Pelosi spoke at the news conference to discuss President Biden’s Build Back Better agenda. Alex Wong/Getty Images

The push to raise the SALT cap to $80,000 is being driven by the Democratic members of the bipartisan SALT Caucus. They hail from just six states and the District of Columbia, representing constituents with an average household income of $132,810—nearly double the national average household income of $67,521. Of the top 10 richest congressional districts in the United States, all are represented by Democrats who are members of the SALT Caucus or have spoken out against the SALT cap in previous statements.

Some defend raising or eliminating the SALT cap on electoral merits, arguing that Democrats who support the measure often come from suburban swing districts, so they need to deliver for their constituents to fend off Republican challengers. But this justification collapses under scrutiny. According to the Cook Partisan Voter Index (PVI), Democratic SALT Caucus members come from districts with an average partisan score of D+13.2. This is just under the average Democratic PVI of D+15.6. That is to say, SALT Caucus members come from districts that are, on average, barely less Democratic than the districts non-SALT Caucus members come from. Only one SALT Caucus member, Andy Kim, comes from a district that Donald Trump won in 2020.

Proponents also argue that members who support raising or eliminating the SALT cap are just representing the interests of their constituents. But this argument fails to capture just how few people would benefit if the SALT cap is raised or repealed. On average, a mere 13.8 percent of constituents living in districts represented by SALT Caucus members will receive more than 80 percent of the total tax cut if the SALT cap is raised to $80,000. For some members of the SALT Caucus, the inequality is even more stark; just 4 percent of constituents represented by Brian Higgins (representing New York's 26th district) will see 80 percent of the tax cut his district will receive from raising the SALT cap to $80,000.

Ideally, Congress would reject any changes to the SALT cap (besides preventing it from expiring in 2025, as Republicans scheduled it to do). But if changes must be made, the recent proposal from Sen. Bernie Sanders (I-Vt.) and Sen. Bob Menendez (D-N.J.) is the least bad option. Their proposal would repeal the SALT cap for families making under $400,000 a year but keep it in place at $10,000 for families making substantially more. This proposal is still regressive, with families making the closest to $400,000 receiving the largest tax cut, but it is a dramatic improvement on House proposals to eliminate or raise the cap, which would also give benefits to people making millions of dollars.

Using the reconciliation bill to give a tax cut to America's richest families is unconscionable, especially when revenue lost to the SALT deduction could otherwise fund important programs from President Joe Biden's agenda. It is antithetical to the values President Biden ran on. But short of eliminating the deduction entirely, which may be politically unfeasible, Congress should do everything in its power to ensure that the benefits of the SALT deduction remain only with the working and middle class, not the upper class.

Colin Mortimer is the Director of the Progressive Policy Institute's Center for New Liberalism.

The views expressed in this article are the writer's own.