The House Democrats’ state and local tax proposal: Bad policy and bad politics

tax forms

Ever since the Trump tax bill capped the deduction for state and local taxes (SALT) at $10,000, Democrats from high-tax states have been looking for ways of protecting their constituents from the consequences. With the reconciliation bill, they have found their chance.

But their proposal—raising the cap to $80,000—is both bad policy and bad politics. Nearly all the benefits go to upper-income Americans, giving Republicans as well as left-leaning representatives an opportunity to attack these Democrats, the self-styled defenders of working and middle-class families, as hypocrites.

According to a Tax Policy Center analysis described by the Center’s Howard Gleckman and Leonard Burman, 94% of the benefits from the House proposal would go to the top 20% of taxpayers, and 70% would go to the top 5%, with annual incomes of $365,000 and more.

Using state and local data, with Bergen County, NJ as my case study, I looked at the consequences of these findings for individual households. Bergen County is located in the northeastern corner of New Jersey and is part of the greater New York City Metropolitan area. This county’s median household income is about $110,000 per year, and the median home value is about $550,000. Married homeowners in this category filing jointly would pay about $12,000 in annual property taxes and about $3,000 in state income taxes, leaving about $5,000 over the $10,000 cap and therefore subject to income taxation.

Now consider married homeowners at the 80th percentile, the beginning of the top one-fifth. Their annual income is $175,000, and I estimate that on average their homes are worth roughly $1 million. In Bergen County, their property taxes would be about $22,000, and their state income taxes, an additional $7,000, for a total of roughly $29,000, leaving $19,000 over the cap.

In Bergen County, raising the cap to $30,000 (instead of $80,000 as stated in the bill) would be enough to negate the tax increase from the $10,000 cap for the bottom 80% of married homeowners. Most Bergen County homeowners would benefit from an increase in the $10,000 cap, but all the additional benefits of a cap higher than $30,000 would go to the top 20%, much of it to the top 5%.

The bottom line? The House Democrats pushing for the $80,000 cap must explain why they want to confer most of the tax benefits of their proposal to the households who need them the least.

The standard answer is that policymakers in high-tax states fear that the Trump SALT cap will drive high-income taxpayers to lower-tax jurisdictions, making it harder to maintain the level of public services that mainly benefit low- and medium-income households. The evidence for this flight of the wealthy is limited, however. Besides, if the reconciliation bill (also known as the Build Back Better, human infrastructure, or social spending bill) is enacted, the additional benefits flowing to low- and medium-income households will dwarf whatever cuts in services that revenue-squeezed governments in high-tax states might impose on them.

An $80,000 cap on the deductibility of state and local taxes would be enough to fully protect married homeowners with taxable incomes of $500 thousand and houses worth $2.5 million. By any measure, this seems excessive. Is it too cynical to wonder whether the kinds of taxpayers who are most likely to make large donations to political campaigns are once again having their voices heard on Capitol Hill?