Republicans from wealthy congressional districts in high-tax states threatened to kill President Donald Trump’s “one big, beautiful bill” if they could not tack on a massive tax break for their wealthy constituents. They got their way in the bill that passed in the House on Thursday morning.
The matter in question is the deductibility of state and local taxes — the SALT deduction.
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Currently, taxpayers who itemize their deductions on their federal returns can write off their local property taxes, as well as their state and local income taxes (and in some cases sales taxes), but only up to $10,000. The $10,000 cap, for single and joint filers, was set by the Tax Cuts and Jobs Act.
As Congress takes up the “one big, beautiful bill” to extend the TCJA’s individual tax provisions (set to expire this year), a handful of members have formed the SALT Caucus to fight for a higher cap on the SALT deduction. The bill that passed out of the House Ways and Means Committee allowed $30,000. The SALT Caucus on the floor won an even bigger tax break: $40,000 per household.
The SALT Caucus is mostly northeastern Republicans and Democrats who say they are fighting to restore something taken away from them.
For instance, Rep. Josh Gottheimer (D-NJ) cast his lobbying effort as a “fight to ensure the full SALT deduction is returned in full … ” This is misleading, though. In fact, for most high earners who benefit from the bill, this will be their first time ever claiming a deduction that large.
The matter of the SALT deduction will play into the Senate debate over the bill. Ironically, the increase in the SALT deduction is a policy Senate Democrats have long demanded, but it’s the truest “tax cut for the rich” in the bill.
Here’s the story of this contentious deduction:
Who claims the SALT?
Most taxpayers do not itemize their deductions because the standard deduction for couples is $29,200. Also, most American households pay less than $10,000 in state and local taxes: the median household in the United States pays about $8,500 a year in state and local taxes.
Thus, for most taxpayers, allowing a SALT deduction greater than $10,000 is doubly irrelevant.
Those who itemize deductions tend to have higher incomes and own expensive homes with high mortgage payments because mortgage interest is deductible.
These high-earning, expensive-home households are concentrated within commuting distance of Wall Street. That’s why Senate Minority Leader Chuck Schumer (D-NY) held a rally in favor of increasing the SALT deduction in Lake Success, a wealthy Long Island town.
The median household in Lake Success earns just about $250,000 a year and lives in a home worth $1.7 million.
A couple in a Lake Success household may pay about $10,000 in state income taxes (depending on deductions), and with an average effective property tax rate of about 2.1%, they’ll pay another $35,000 in property taxes.
This is the couple — a quarter million dollars in income and a $1.7 million home — that the SALT Caucus is targeting with its tax breaks.
Under current law, this couple can deduct only $10,000 of their state and local taxes. The current House bill would increase the deductibility to $40,000. Multiply that extra $30,000 in deductions by the 24% rate, and this is a $7,200 tax break for the wealthy couple.
For the SALT Caucus, this tax cut for the rich is a mere compromise. They want an $80,000 limit. For the median rich couple in Lake Success, paying $45,000 in state and local taxes, the net tax cut would be $8,400. For those wealthy enough to owe $80,000 in state and local taxes, the net tax cut would be $24,500 (because they would very likely be in the 35% tax bracket).
Gottheimer is perhaps the leading champion of the SALT deduction. Representing a wealthy exurban district in northern New Jersey, he regularly attacks Republican states such as Kentucky as moocher states because the residents are older and have lower incomes (thus they collect more in Social Security and Medicaid while paying less in federal income taxes).
Gottheimer attacked the 2017 Tax Cuts and Jobs Act as the “2017 Tax Hike Bill.” This has been a standard Democratic talking point, and an inaccurate one. Two-thirds of American households received tax cuts from the TCJA, and only 10.2% of New Jersey households saw a tax increase.
Surely some of Gottheimer’s upper-middle-class constituents saw a tax hike from the TCJA, which capped SALT and limited the deduction for the interest on very large mortgages. But even for those high-income, high-tax, expensive-home rich folk in Saddle River, New Jersey, or Lake Success, the TCJA was most often a tax cut. The average household in all five income quintiles in New Jersey received tax decreases.
Here’s why:
First, the TCJA lowered the tax rate in every bracket. Admittedly, there was a larger percentage reduction in the lower brackets, but the wealthy benefited from those reductions, too. For instance, a couple with $200,000 in taxable income pays 24% on its marginal dollar under the TCJA, compared to 28% before the bill passed.
Second, the TCJA changed the point at which the child tax credit phases out. Before the TCJA, the tax credit began shrinking as parents’ income surpassed $110,000; after the TCJA, the credit didn’t shrink for anyone making less than $400,000. So, a family of four earning $250,000 would have gotten a child tax credit of about $1,200 in 2017, but come 2018, they could pocket the full $4,000 child tax credit.
TCJA fixed the alternative minimum tax
But here’s the biggest point that shows how misleading the SALT Caucus is: many of Gottheimer’s wealthy constituents actually increased their deduction for state and local taxes. That’s because the TCJA freed most upper-middle-class households from the alternative minimum tax, which barred them from deducting any of the state and local taxes.
Congress created the alternative minimum tax in 1969 to keep wealthy taxpayers from exploiting too many tax breaks. The thresholds of who owed the alternative minimum tax were not originally indexed for inflation, and so many upper-middle-class taxpayers were roped into it — more than 5 million households were paying the alternative minimum tax by 2017.
That means that before the TCJA, 5 million households got, in effect, zero deductions for their state and local taxes. The TCJA raised the alternative minimum tax thresholds in 2018, and so most of those 5 million households finally got their SALT deduction, even if it was capped at $10,000.
Notably, Gottheimer and his SALT Caucus colleagues are not calling for repeal of the TCJA because that would increase taxes on their constituents. Instead, they want to keep all the provisions that aid their wealthy constituents, including lower rates, a later phaseout for the child tax credit, and a later phase-in of the alternative minimum tax, but massively increase the SALT cap.
The bill that passed the House on Thursday curbed the deduction a bit more for very high earners: above $500,000 in annual income, the deduction would start shrinking.
Nevertheless, this provision, demanded by moderates and supported by Democrats, is a brand-new tax break for upper-middle-class elites in high-tax areas. It is a multithousand-dollar tax break for a small, wealthy sliver of the population.