A new analysis from the Institute on Taxation and Economic Policy provides critical data for the debate over whether to repeal the $10,000 cap on state and local tax (SALT) deductions.
The report, Not Worth Its SALT: Tax Cut Proposal Overwhelmingly Benefits Wealthy, White Households, finds that repeal of the SALT cap without other reforms would worsen economic disparities and exacerbate racial inequities baked into the federal tax system. Black and Hispanic families are respectively 42 percent and 33 percent less likely to benefit from SALT repeal than white families. Overall, 72 percent of the benefit of SALT repeal would go to white households. More specifically, white households earning more than $200,000 a year are 6.7 percent of all households but would receive 66.8 percent of the benefit of SALT repeal.
The analysis comes as the U.S. Senate today holds a hearing on the tax code and racial, ethnic and gender disparities. It uses tax and survey data to disaggregate the impact of SALT cap repeal by race. And it finds that, at the national level and in every state with available data, Black and Hispanic families would receive smaller average tax cuts than white families, thereby growing the gap in after-tax income between these families and higher-income white households. The same is true for Indigenous families in states where data are available.
This new report builds on a previous ITEP analysis that found 85 percent of the benefit of SALT repeal would go to the highest-earning 5 percent of households, with 60 percent going to the top 1 percent.
“These are important data to consider in the context of long-overdue public discourse on how to address economic inequality and transform our economy so that more people can achieve economic security,” said Carl Davis, ITEP research director and an author of the report. “There is also a long history of tax and other public policies that have allowed white families to build more wealth. Repealing the SALT cap without replacing it with a stronger limit on tax breaks for the rich would cement yet another inequitable policy that advantages rich white families.”
Enacted as part of the 2017 Tax Cuts and Jobs Act, the SALT cap has long been a sore point for Democratic lawmakers in “blue” states such as California, New York and New Jersey. High-income taxpayers in those states are more likely to have more than $10,000 in state and local tax, and some lawmakers from those states seek to return to tax policies that placed few limits on write offs for those tax payments.
Further, lawmakers in these states have formed a caucus and say they will not support President Biden’s infrastructure proposal if it does not also repeal the SALT cap. This threat is backed by claims that middle-income families in these states are paying more in taxes as a result of the SALT cap. As ITEP’s new and previous analyses show, the primary beneficiaries are households earning more than $200,000 a year, and even in wealthier states, these households fall in the top quintile of earners.
One of President Biden’s first acts was an executive order to form a data working group to determine how federal agencies can provide more data disaggregated by race. The executive order stated, “advancing equity requires a systematic approach to embedding fairness in decision-making processes, executive departments and agencies. [Agencies] must recognize and work to redress inequities in their policies and programs that serve as barriers to equal opportunity.”
Policymakers interested in progressive tax reforms should make sure their proposals don’t worsen the racial income and wealth divides.
“The tax code impacts communities differently– helping some to get ahead and denying those same benefits to others,” said Jessica Schieder, an ITEP fellow and co-author of the report. “Analyses of tax policy that disaggregate impact based on race and ethnicity need not be a rarity. Agencies have the available data. They should move forward with initiatives to improve the disaggregation of data by race and shine a light on how tax policies impact all people.”