The Weird Politics of the SALT Deduction
There's momentum for changing the most controversial Trump era tax change.
WaPo (“House considers expanding state tax deduction for some families“):
The House is preparing legislation to cut federal taxes for relatively high-income married couples in high-tax states, a measure meant to placate politically vulnerable Republicans who last week nearly held up another tax relief measure for working families to force a vote on the issue.
The legislation, sponsored by Rep. Michael Lawler (R-N.Y.), would raise the cap for the state and local tax deduction, known as SALT, for married couples who file taxes jointly and make up to $500,000.
Congress had capped the deduction both for individuals and couples at $10,000 to help pay for President Donald Trump’s 2017 tax cuts. Lawler’s bill, which has support from a phalanx of other Republicans from Democratic-controlled states, would let married couples offset up to $20,000 of income on their federal returns with state and local taxes for the current tax year. The cap would drop back to $10,000 in 2024 until it expires in 2026.
The bill, though, is entangled in larger disputes over which factions of the raucous GOP conference control the House, how Republicans will attempt to hang on to the chamber in November’s elections and the early skirmishes in the debates that will ensue when the Trump tax cuts expire in 2025.
The House last week passed another tax bill to expand the child tax credit, mostly claimed by working parents, and restore certain corporate tax breaks. The measure, which still must pass the Senate, could lift 400,000 children out of poverty, according to nonpartisan estimates.
The balance in that bill satisfied members of both parties — mostly Democrats for the tax credit expansion and mostly Republicans for the business provisions, though each part of the deal had support in both parties — and helped lawmakers build up their tax policy priorities ahead of a larger legislative push expected at the end of the year.
But residents of high-tax states who used to be able to deduct their entire state and local tax bills — property and income taxes alike — have been pushing to change the SALT cap since the 2017 tax bill.
Even at the $10,000 cap, the deduction is still mostly taken by wealthier tax filers, who earn enough to owe larger state and local tax bills and have enough other deductions to make it worth itemizing rather than taking the standard deduction, which is worth $27,700 for married couples filing jointly this tax season.
The nonpartisan Tax Foundation found that the vast majority of the benefits of doubling the cap would go to couples who earn more than $200,000, and between a third and half of them would see a tax cut. A different nonpartisan estimate by the Penn Wharton Budget Model at the University of Pennsylvania found that the legislation would cost $12 billion in lost federal tax revenue.
But Lawler and other New York and California Republicans represent districts that President Biden carried in 2020, and theymay face longer odds to reelection after liberal state legislatures redraw congressional districting maps. Bringing home a SALT expansion, the lawmakers say, could be key to the economic planks of their campaigns.
As noted before, this change in the tax code hit us pretty hard. We went from pretty routinely getting a refund on our taxes to owing taxes until getting our deductions sorted out. Our state and local tax bill is somewhere in the neighborhood of $30,000 a year, as Virginia has rather high property taxes, including maddeningly high annual taxes on vehicles one already owns.
From a public policy standpoint, I can preach it either way. On the one hand, there was fairness to the old policy of unlimited deductibility: people shouldn’t pay income taxes on money that was already confiscated by another government. On the other, the burden falls on relatively high earners and removing the deductibility increases tax revenues that would otherwise have to be made up elsewhere. (In between, there’s certainly an argument to be made for phase-outs rather than immediate changes to this sort of tax policy, since people make long-term financial decisions like home purchases based on longstanding policy environments.)
But, of course, this is about politics, not policy. The deduction was capped under Republican control of the government almost entirely with the aim of screwing over Democrats. It’s people who live in major urban centers and “blue” states who tend to have the highest state and local tax burden. And the momentum for repeal is coming from folks who represent those people.
You could argue the economics and talk about fairness, but as you note this was clearly about politics. On that basis I think the current proposal is pretty reasonable. It still hits the ultra-wealthy but if you are two teachers making $130,000/year then you dont get hit with this.
Steve
This is one of the (minor) things that led me to view politics in the US to be a battle between “outcomes based governance” and “Jim Crow governance”. You can sum up part of the Jim Crow model as “identify people you don’t like and do everything you can to screw them over in ways both major and petty”. Of course, the ultimate example of this as applied to national politics was when the Southern State Senators voted against aid for New York and New Jersey after Hurricane Sandy, despite the certainty that they would eventually be asking for similar packages themselves. While it is true that all too many people, all over the country, are more motivated by sticking a finger in the eye of people they don’t like than by solving problems and advancing everyone, it is the Deep South where this remains the primary motivator of government.
I lived a total of four years in the Deep South and one of my takeaways was that it was full of people who would shoot holes in the bottom of the lifeboat because they couldn’t stand to see the other guy dry.
@steve: The real motivation of this is a) it has an outsize impact on those areas in the Northeast that have Republican Reps and Senators, which tend to be wealthier, and b) that it’s starting to affect too many people in the trump states because of rising housing costs.
Given that the Republican House seems to be walking away from an immigration bill that gave them almost all they could hope to get out of a compromise in order to not give Biden a win, it’s hard to see why they would go for this here.
That said, there are a lot of vulnerable Republicans in swing seats that campaigned on this in places like NY. So the Biden win might be isolated enough to make the trade worth it to maintain control of the House.
The GOPs are still a plutocratic party. A lot of plutocrats live in states with high property taxes. Capping SALT was an uncharacteristically progressive tax thing for GOPs to do.
I think it’s a big mistake to evaluate policy by intentions and not the policy itself. There are plenty of cases where people had the best intentions, but the policy was crap. We don’t (or shouldn’t) argue that we should keep those policies because the proponents meant well. The opposite can also be true.
In the case of SALT, it is, IMO, a bad policy. You still have to be relatively wealthy to get it, considering the standard deduction was significantly increased, and few people have the income and deductions to make itemizing worth it.
Just for reference, $200k is ~89th percentile for income in 2023 – so almost the top 10%.
Alternatively, what I would do, is bigger reforms like capping itemization generally. One of the good things about the Trump tax reforms was increasing the standard deduction and getting most taxpayers (85-90%) to use that. IMO, we ought to work toward making itemization even more the exception.
@Andy: While your ananysis sounds good on the surface, the reality is that trump state congress critters crafted the law to screw New York, and to a lesser extent NJ, MA, CT, etc while preserving the exemption for the vast majority of their own upper middle class. It’s all well and good to say we should put that aside, but I don’t see any reason to do that, given that these assholes will continue to try to make life miserable for those they don’t like. That’s what they do, that’s their motivation, that’s who they are.
@MarkedMan:
So, the gist seems to be that you support a huge tax cut for the wealthy for reasons that seem to be based mostly on spite.
@Andy: I’m honestly not sure how useful national averages are in these conversations. $200,000 is a whole lot more money in Bumfuckt, Kentucky than in LA or NYC. Even the Federal government recognizes that, with rather sizeable locality pay differentials for civil servants and COLA/FHA differentials for military personnel.
When I lived in (13%) California, I was outraged by this. Outraged, I say!
Now, living in (0%) Nevada I find my outrage has lessened. I think it’s just that I’m more mature now. I mean, I turned 69 in Vegas and there is such a developmental gap between ages 68 and 69.
@Andy:
Please. Here in CA and other high cost of living locales, you don’t have to be relatively wealthy to qualify for SALT. This was Trump and his fellow Red State legislators sticking it to ‘wealthier’ Blue State citizens. Their intent was to prod or incite Blue State voters into demanding reductions in state/local taxes.
In CA, the SALT deduction is largely for itemized mortgage interest and property tax expenses. As you know, in CA property taxes are calculated based on (the now beloved by) State Proposition 13. Local authorities have nothing to do with setting property taxes. Prop. 13, as enshrined in the State Constitution, says that when you purchase a home, property taxes are re-set at a baseline of one percent (1%) of purchase price and increases are capped at a rate of 2% per year. Buy a house for $700,000 and your base property tax is set at $7,000, from that point annual increases can be no more than 2% of that. Mortgage interest depends on the amount financed and the interest rate.
@James Joyner:
It’s entirely relevant to these discussions. Income taxes are based primarily on one’s level of income, not on how far that income will take you at whatever particular location you live.
And we are talking state and local taxes here. If $200k is a pittance to live on in NYC, then the city and state can adjust their taxation to be more progressive and lower the burden on those earners to match the reality of the cost of living.
I’m not unsympathetic to the high cost of living. When we moved from Florida back to Colorado we went from a state with very low taxes to one with non-trivial higher taxes, higher housing and other costs. It’s about $7k a year. We work remotely and don’t get locality pay, so that was just the cost of living in Colorado vs. Florida. We don’t have either high enough incomes or enough deductions to itemize, so we have eaten that cost from our budget. And we’re fine with that – it was a choice. I mean, I would like to deduct some of that from my federal taxes too, but I can’t, and I’m OK with that.
To me, it doesn’t make much sense for the federal government to subsidize the state and local taxes only of high earners. My view is that there shouldn’t be a SALT at all, but if there is a SALT, then it should be capped and the deduction should available to everyone, even normie middle-income people like me.
@al Ameda:
SALT is different from the mortgage interest deduction.
Secondly, you must itemize to take advantage of SALT, and only about 10-15% of tax filers itemize. It’s unclear what subset of that can take advantage of SALT, but we are talking about a minority of taxpayers.
And the analysis in the OP is pretty clear that raising the cap almost entirely benefits the top 10% of earners.
@Andy: No, I think it is ludicrous to say, “Well, this guy is punching me in the face, but I really needed the exercise.” And just for the record, although I was a homeowner for 25-30 years, I’m a renter now, so this has no effect on me personally.
This is exactly like voter ID. trump staters want voter ID because they want to make it harder for poor people to vote, full stop. It’s a mugs game to let them shift the debate to the best way to insure against voter fraud.
@Andy:
What the hell does that have to do with anything? The SALT deduction is the opposite of income taxes, it’s a fricking benefit! And was meant to help people afford a home. The cost of homes in your area is 100% relevant to that benefit.
@Andy:
I’m tired of this cannard. You left out insurance, which in Florida, wipes out whatever other savings you might have. In California, I pay less than 1/2 of the going rate in FL for my property insurance. It’s one of the reasons I sold my property in Florida.
I’m tired of this cannard.
@Andy: Andy, you’re argument seems to stem from an unawareness that the trump states have the most regressive taxes and the blue states have the least regressive taxes already. Maybe the solution is for trump states to have a less regressive tax basis? Or actually have functional infrastructure and not constantly rob from the blue states for basic services? Or maybe they should stop colluding with management to keep their workers from enjoying the benefits of unionization? Or stop trying to drown public schools in the bathtub so their work force remains ignorant and sheep-like?
@EddieInCA: Not to mention auto insurance, where Florida is also the most expensive state.
“So, the gist seems to be that you support a huge tax cut for the wealthy for reasons that seem to be based mostly on spite.”
It was a tax increase based solely upon spite. The GOP oppose tax increases, except in this one specific case. Put it back to baseline. A lot of people have lived in those states for many years and had planned based upon tax laws/rules that have existed for many years. Maybe change it so that new people moving into the state are affected. I can see that maybe not being spite driven. Maybe.
Steve
The SALT exemption benefits people living in states with high taxes (and generally a larger support for poor people because of that) and progressive taxation. And that makes it easier for states to organize their governments that way.
But, it doesn’t do enough that it actually changes the behavior of states (Washington State has always had a delightfully regressive tax system for instance, and the cap didn’t get California to shift the tax burden onto the poor).
@Andy:
Yes, but you can’t look at SALT alone.
Forr a person to benefit, their total deductions would need to be above the standard deduction. So mortgage interest plus SALT. Raising mortgage interest (either by rising interest rates, or by raising the price of housing) makes SALT deductions much more likely to have an effect.
Since a large chunk of SALT is the property taxes, higher property values will have an outsized impact on that total deduction.
(Meanwhile, high-income renters get less benefit — a group that exists roughly only in big blue cities.)
@MarkedMan:
As we can see here, it really is all about whose bread gets buttered and whose ox gets gored.
You can try to defend a SALT on your long list of dubious irrelevancies all you want, but at the end of the day, what you’re advocating for is giving a tax break to the wealthy who happen to live in states and localities with high taxes to the tune of ~$12 billion a year.
@EddieInCA:
Your whole comment is a cannard. Also, you’re wrong on the facts. Homeowner insurance is more expensive in Colorado than in Florida. Colorado is one of the most expensive states in the country on that metric – our insurance doubled moving here. Regardless, I can’t deduct homeowners insurance so it is not in any way comparable to SALT.
The point I was making to James is that the fact that $200k doesn’t go as far in some places as compared to others is something the federal income tax system mostly doesn’t care about, rightly or wrongly. The fact that some things cost more in some parts of the country and less in others is irrelevant to the discussion. Insurance is one of those things. It doesn’t affect what I pay the feds on my taxes.
@Gustopher:
I agree with a lot of that. Hence why I think we ought to reduce deductions generally.
And yes, high property values drive high mortgages and high property taxes. It’s not a coincidence that the places where the SALT and mortgage interest deduction provide the biggest benefit are also the places with the worse housing policies and where NIMBY regulations are creating those housing conditions.
And yes, your last point is another one against SALT – yet another way renters get screwed in expensive housing markets.
@Andy:
My wife is from Florida. I lived in Florida. I owned, until recently, two properties in Florida.
I said “insurance”, not just homeowners insurance.
Most expensive auto insurance: #8, Florida.
Colorado is way below them.
Renter’s Insurance: Florida costs almost double what Colorado costs.
My point that the whole idea that ‘Florida has lower taxes” so it’s preferable is bullshit. There are more factors than just income taxes and property taxes.
@Andy:
This just dumbfounds me. You keep tying this up with income tax for some reason. It is not a tax. It is a benefit. The benefit is put in place, rightly or wrongly, to benefit people who want to buy a home, to encourage them to buy one. Of course it is relevant how much the price of the home is in that area! How could it not be?!
@EddieInCA:
Yeah, there are way more factors than income taxes and property taxes. No shit, never said otherwise – that’s actually a core part of my point!
And Dude, I grew up in Colorado and lived in Florida for about 8 years and then moved back to Colorado. Sorry, but I know the numbers, Colorado is a lot more expensive unless we’re comparing extremes (South Beach, Aspen). Yeah, you can – as you’ve done – cherry-pick things that are more expensive in Florida, but my wife and I are budget nerds that track almost to the penny, and we know the numbers – at least for us. So don’t tell me what I’m saying is bullshit. Colorado is a lot more expensive.
And again, most of those factors DO NOT MATTER for the discussion here on SALT specifically or even income taxes generally. But I will say WRT to SALT that we pay more in state and local taxes here in Colorado than we did in Florida, but don’t get jack shit from SALT because I’m not wealthy enough to be able to itemize. Again, I’m not complaining about it; that’s just the way things are in a federal system and we factored that into our planning and are much, much happier here than in Florida, all things considered.
@MarkedMan:
Yeah, it’s a benefit – on your income taxes! So is lowering marginal tax rates, not taxing capital gains, getting solar put on your house, deducting all the other shit you can deduct.
I’m “tying this up with the income tax” because SALT is another one of those things – it’s about the income tax because people claim it on their income tax return, so they don’t pay as much income tax. And people are mad that it changed because now they have to pay more income tax to the federal government and wish they didn’t have to do that. That is why I am “tying this up” with the income tax!
@Andy:
You have a very expansive sense of what are ‘dubious irrelevancies’
Many people plan a home purchase with SALT and mortgage interest in mind. Pulling the cap down cost me about two thousand dollars in increased taxes. I can handle that, but I can tell you, Republicans wanted to stick it to me and tens of millions of California homeowners and they succeeded.
@al Ameda:
I agree with you completely about the sudden change. It should have been phased in.
I would be happy with a compromise where we bring back some semblance of the old SALT and then ratchet it down a bit each year to the current SALT cap over a decade and perhaps to nothing over two decades. Of course, the problem with that is people want the benefit for eternity, and it will likely be another doc-fix situation.
But SALT is just one aspect of the bigger issue of itemized deductions generally, which are definitionally tax expenditures that subsidize certain expenses, but only for those with the wealth and income to afford to spend enough on those expenses to itemize. (Again, ~10-15% of tax filers). It’s a bad system.
@Andy:
We agree there. But perhaps the worst part is that the wealthy have managed to dupe so many people into believing that income tax is the only tax that matters. So you have entire police forces in the trump states that do nothing but follow people of color around ticketing and fining them into oblivion, just so the suburbanites can brag about their low taxes.
@MarkedMan: Indeed when I moved to Texas that whole income tax is the only tax that matters thing started driving me nuts. Yeah sure Texas has no income tax. Instead you have fees on top of fees on top of other taxes. Meanwhile government services are poorly funded/organized to the point that a visit to the DMV takes +6 hours…
I swear government in Texas is designed to be as ineffective and terrible as possible. It’s like “Government is always the problem! Elect us so we can prove it!!!” resulted in the current state of Texas.
Yeah, I can’t see much of any policy argument for the mortgage interest deduction, which got capped. It hurt me, but it seems better policy.
SALT is a bit different, though. Here in California, I don’t think you need to be all that high of a percentile rank, at least within CA, to hit the cap. Houses are expensive, and that makes property taxes on them really high. I mean, sure, you can move to Las Vegas … if your job allows it.
I really not all that certain about this on policy grounds. I do think it was a big mistake by the Republicans politically speaking.
@Andy: “So, the gist seems to be that you support a huge tax cut for the wealthy for reasons that seem to be based mostly on spite.”
Opposite day?