BEYOND THE NUMBERS
When the Senate considers the landmark Build Back Better (BBB) legislation following expected House action, it should replace the House provision on the state and local tax (SALT) deduction with an alternative approach advanced by Senators Bob Menendez and Bernie Sanders. While the House provision would dramatically increase the current cap on the SALT deduction, providing large tax cuts for wealthy households, the Menendez-Sanders approach would better target the tax cut and avoid windfalls for the richest people.
The 2017 tax law imposed a $10,000 cap on the state and local taxes that filers can deduct on their federal returns. (Previously, filers could deduct an unlimited amount of state and local income and property taxes for federal tax purposes, subject to the individual alternative minimum tax or AMT.) This “SALT cap” is slated to expire after 2025, along with most of the law’s other individual tax provisions. The House bill would raise the cap to $80,000 and extend it through 2030, then set the cap at $10,000 for 2031 only, after which it would expire.
The alternative from Senators Sanders and Menendez would exempt people below a certain income threshold from the $10,000 cap. Sanders has suggested setting the threshold at $400,000, consistent with President Biden’s pledge not to raise taxes on households with incomes below that level; Senator Menendez would set the threshold somewhat higher. Either way, this approach would exempt the vast majority of households — including all middle-income households — from the cap. And it would avoid the biggest flaw in the House proposal, which would provide wholly unnecessary tax cuts of up to $25,900 to many of the country’s richest people, as explained below.
Here’s some background. The SALT cap in the 2017 tax law targeted households with higher incomes who pay substantial state and local taxes; these households disproportionately live in states that impose higher taxes to support more robust public services, where political power tends to be held by Democrats. In these states, the cap typically affects about 9 in 10 households with incomes in the top 95th to 99th percentiles. But these households still received the largest net tax cut from the 2017 tax law, measured as a share of their income, because the other tax cuts in the 2017 law far outweighed the tax increase imposed by the SALT cap — even in the states most affected by the cap.
There are several reasons why these households received such large tax cuts from the 2017 tax law despite the SALT cap, but two stand out. First, the law lowered income tax rates across many of the seven tax brackets, and all of these rate cuts benefit upper-income households. Second, the law substantially scaled back the AMT in ways that made the AMT much less likely to affect taxpayers in the 95th to 99th percentiles. In New Jersey, for example, where this group has incomes ranging from roughly $337,000 to $1.1 million, they received tax cuts averaging 3.5 percent of income from the 2017 law, according to the Institute on Taxation and Economic Policy. The top 1 percent of households also received large tax cuts from the 2017 law. None of these high-income households needs another tax cut.
While House proponents of increasing the SALT cap frequently argue that their goal is to protect middle-class families, the Menendez-Sanders approach more than satisfies this goal by exempting all but the highest-income households entirely. The House provision, by contrast, would expand the amount of state and local taxes that any household could deduct, no matter how high its income. Households making several million dollars a year could get a $25,900 tax cut. (This amount represents the 37 percent top tax rate multiplied by the $70,000 increase in the cap amount.) This is especially problematic because one of the House bill’s most important policy changes to reduce tax advantages at the top is a surtax on the adjusted gross incomes of very rich people. The surtax, however, wouldn’t kick in until incomes reach $10 million, so someone with a $9 million income wouldn’t face the surtax but would get up to a $25,900 tax cut under the House bill’s SALT provision.
As result of its large SALT tax cut, the House bill’s income and payroll tax provisions together would provide a tax cut to nearly 80 percent of households with income between $500,000 and $1 million (whose tax cuts would average $8,800) and to 70 percent of households with incomes over $1 million (whose tax cuts would average $16,960), the Tax Policy Center estimates. There’s no way to justify these tax cuts as “middle-class” tax relief. They are particularly egregious given that BBB aims to provide the most help for low- and middle-income households while reducing tax advantages for wealthy households.
The House Build Back Better legislation as a whole is a historic step forward: it would make child care and health care more affordable, lower prescription drug prices for seniors, and reduce child poverty, while fully offsetting the cost by raising taxes on high-income individuals and multinational corporations and collecting more of the taxes already owed. The Senate can improve this landmark legislation by replacing its SALT provision with the far superior Menendez-Sanders approach.