House Democrats Push Surprising Tax Break for the Rich

House Democrats Push Surprising Tax Break for the Rich

Graeme Sloan/Sipa USA

The latest version of the Build Back Better Act, which the House could vote on a soon as this week, includes a controversial tax break that would overwhelmingly benefit high-income households, though whether it will survive revisions in the Senate is still an open question.

Pushed by lawmakers from high-tax states, House Democrats are proposing to increase the state and local tax (SALT) deduction to $80,000 through 2026, up from the current level of $10,000. Doing so would provide a tax cut worth about $285 billion over the next five years, with almost all of the benefits flowing to the top 10% of households.

If passed, the tax break would be the second most costly provision in the bill, trailing only the establishment of universal pre-K and affordable child-care programs, which would cost $390 billion over five years. It would cost more than paid family and medical leave ($195 billion over five years), clean energy and electricity tax credits ($190 billion over five years) and the extension of the expanded child tax credit for one year ($130 billion).

Who would get a break: According to an analysis by the Tax Policy Center, the bottom 80% of taxpayers would receive very little benefit from the SALT cap increase, less than $100 on average, with nothing at all for the bottom 40%. Savings get more substantial at the top of the income ladder, hitting nearly $15,000 per year for the top 1% (those with incomes over $867,000).

The size of the benefits relative to other provisions in the bill is quite uneven, as well. According to an analysis by the Committee for a Responsible Federal Budget, a household in Washington, D.C., with an annual income of $1 million would get about 10 times the benefit from the SALT cap increase as a middle-class family of four would receive from the expansion of the child tax credit.

Howard Gleckman of TPC says it’s inevitable that high-income households will benefit from an increase in the SALT deduction cap. “Anything you do to eliminate the SALT cap is going to be regressive, because that tax is overwhelmingly paid by very high-income people,” Gleckman told The Washington Post. “Anything you do to lower that tax doesn’t matter for most people.”

The proposal’s supporters say that despite costing hundreds of billions of dollars in its first five years, it would actually raise revenues over 10 years relative to the current baseline because of the way it is structured. The proposal would raise the SALT deduction cap for nine years, and then reduce it to $10,000 in 2031. This would increase revenues because the baseline assumption is that the current $10,000 cap expires in 2025.

Still, the proposal isn’t backed by all Democrats. “This is a touchy issue and controversial issue even among folks on the center left,” Garrett Watson of the Tax Foundation told the Post. “It was inserted late in the game, perhaps because of these competing desires to make the tax code more progressive, but also to provide tax relief to certain higher-income constituencies who, right or wrong, feel like they’ve been treated unfairly.”

An alternative plan: The SALT proposal is expected to make it into the final House version of the bill, but it faces an uncertain future in the Senate.

Senate Budget Committee Chairman Sen. Bernie Sanders (I-VT) is working on a version of the SALT deduction that would impose an income threshold for claiming the tax break, in an effort to limit its use by high-income households.

Under the still-developing proposal, taxpayers under a given income threshold —Sanders has cited $400,000 per year in the past — would be able to deduct all of their state and local taxes on their federal returns. Above that income level, deductions would be limited to the current cap of $10,000.

“I am working with some of my colleagues to make sure that we come up with a proposal that protects the middle class, but does not end up with an overall reconciliation bill in which millionaires are better off tax-wise than they were under Trump,” Sanders said Tuesday.

Sen. Bob Menendez (D-NJ) is working on a similar proposal, though with a higher income limit. A threshold of $550,000 would cover 99% of taxpayers in his home state of New Jersey, Menendez told Roll Call.

A blue state problem: An analysis by Roll Call of the congressional districts that benefit most from the SALT deduction makes it clear that the current cap is an issue in overwhelmingly Democratic areas — in some ways no surprise, given that Republicans imposed the cap in their tax bill in 2017, in what some Democrats saw as a deliberate attempt to punish wealthy districts, largely on the coasts, that have high taxes and extensive public services.

Of the 25 districts that benefit the most from the deduction, all but one are represented by a Democrat. Average state and local tax payments are the highest in New York’s 12th district, which includes large parts of Manhattan’s wealthy east side. Among households claiming the SALT deduction, payments of state and local taxes average $109,935, Roll Call found, while incomes for those households average $885,452.

The second-ranked district is also in New York City, while the next four are in California, and all of the top 10 are in those two states.

Republicans have been happy to point out that the benefits flow to these high-income districts and households. “I’m surprised Democrats are prioritizing a huge tax windfall for millionaires and billionaires over some of the other priorities they began with,” said Rep. Kevin Brady (R-TX), ranking member on the House Ways and Means Committee.