Just Taxes Blog by ITEP

Senators Menendez and Sanders Show the Way Forward on the SALT Cap

Senators Menendez and Sanders Show the Way Forward on the SALT Cap

November 3, 2021

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

Congressional Democrats negotiating the Build Back Better legislation are at a crossroads.

Some Democrats want to amend the Build Back Better plan to repeal the $10,000 cap on federal deductions for state and local taxes (SALT). This would allow many rich people to pay lower personal income taxes than they pay now, as illustrated by new estimates from ITEP explained further on.

But other members of Congress are finding a better path forward. Sen. Bob Menendez of New Jersey, a state where many lawmakers want to fully repeal the SALT cap, has now come out against that approach. He joins Sen. Bernie Sanders in supporting a compromise that would lift the SALT cap for those with incomes below $400,000 and phase it in for people with higher incomes. An earlier ITEP report examined this compromise and found that it costs less than a third as much as repealing the cap fully and is much less regressive.

The Problem with Fully Repealing the Cap on SALT Deductions

The SALT cap is the only significant provision of the 2017 Tax Cuts and Jobs Act that limits tax breaks for the rich. To be sure, Republicans included this revenue-raising provision in their bill because it mainly takes tax breaks from people living in high-tax states, which are mostly “blue” states. This is clearly not a sound way to make tax policy.

But the answer cannot be to simply repeal the SALT cap, as many congressional Democrats propose. Estimates from ITEP show that the majority of benefits from fully repealing the SALT cap would go to the richest 1 percent.

Amending the Build Back Better bill to fully repeal the SALT cap would mean that the richest 1 percent could pay less in personal income taxes than they do now, which goes against everything President Biden has said for the past year as he promoted this legislation.

The White House set out the latest version of the Build Back Better plan in a framework released last week. Although it has several provisions raising hundreds of billions of dollars by limiting loopholes and tax breaks in the corporate income tax, only two provisions would raise taxes paid directly by rich individuals next year. One would shut down a loophole in the net investment income tax. The other would apply a 5 percent surtax to income exceeding $10 million and an additional 3 percent surtax to income exceeding $25 million. Another provision in the White House’s framework would limit business losses claimed by high-income people, but this will have no impact for a few years. The net effect of these tax increases and SALT repeal would be lower taxes for some high-income households.

As illustrated in the table below, ITEP’s preliminary estimates show that the average tax increase for the richest 1 percent resulting from these provisions would be about $35,000 in 2022.

 

As illustrated in the table below, repealing the SALT cap would cut taxes for the average member of the richest one percent by a little more than that, by $38,000 in 2022.

 

In some ways these estimates do not fully capture how bad the situation would be if the SALT cap is fully repealed. These are distributional estimates, meant to show the effects of tax changes on people in different income groups. Estimates of the revenue raised by the bill’s tax increases will reveal that they produce less revenue than is shown here after considering the behavioral effects of the surtax. Behavioral effects in this context is often used to describe the things wealthy people would do to avoid paying a tax increase, like holding onto assets to avoid reporting capital gains income.

Dueling Compromises

One compromise is the one supported by Sens. Menendez and Sanders as explained above. As described in ITEP’s report, it would lift the cap on SALT deductions for those with adjusted gross income (AGI) below $400,000, and it would phase in the cap for those with AGI between $400,000 and $500,000.

As illustrated in the table below, this would cost only 30 percent as much as fully repealing the SALT cap in 2022 and little of the benefits would go to the richest 1 percent.

 

Another compromise that is rumored to be under consideration by congressional Democrats would simply raise the cap to $72,500. ITEP’s analysis finds that this would cost 62 percent as much as fully repealing the SALT cap in 2022 and more than a third of the benefits would go to the richest 1 percent. Three-fourths of the benefits would go to the richest five percent. There is no reason for lawmakers to choose this approach when a less costly, less regressive option is available.

 

Are These Proposals Paid For? It’s Complicated.

Like most of the Trump tax law’s changes to the personal income tax, the cap on SALT deductions expires at the end of 2025. Many lawmakers want to change the cap through 2025.

Proponents of repealing the SALT cap through 2025 had considered “offsetting” the cost by reinstating the SALT cap for years after 2025, which would raise revenue compared to current law. As Sen. Menendez pointed out, this is a gimmick. Proponents of repealing the SALT cap would obviously try to repeal the cap again before 2026 to keep it from going into effect.

However, the proposal to lift the SALT cap for those making less than $400,000 could more plausibly be offset. The limited version of the SALT cap, which would not apply to those with income below $400,000, could be extended into years after 2025. This would raise revenue in those years compared to current law. Over the next 10 years, the proposal as a whole could be revenue-neutral or even raise revenue. Once this proposal is in place, it would be difficult for lawmakers to repeal what remains of the SALT cap because doing so would only benefit the very rich. This is another reason why the Menendez-Sanders compromise is the most promising path forward.



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