Dems Battle Over Tax Break for the Rich

DC: U.S. Capitol, Supreme Court
Graeme Sloan
By Yuval Rosenberg

Happy Tuesday! President Biden traveled to New
Hampshire today to tout his newly signed infrastructure law and
talk about how it will modernize the nation’s roads and bridges.
House Democrats, meanwhile are pushing for a vote on the next part
of Biden’s economic agenda, the package of climate and social
programs, by the end of the week. "We're going to get it done this
week," Majority Leader Steny Hoyer (D-MD) told reporters. But there
are still some big battles ahead, like…

Democrats Battle Over Tax Break for the Rich

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: 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.

Tweet of the Day

Ben
Ritz, director of the Progressive Policy Institute’s
Center for Funding America's Future, points out that Democrats’
have moved the goalposts for measuring the fiscal impact of the
Build Back Better plan.

Numbers of the Day

1.7%: “American consumers are dour about the economy and
worried about inflation,” Coral Murphy Marcos and Ben Casselman
write at
The New York Times. “But that isn’t keeping them
from spending.” Retail sales increased by a greater-than-expected
1.7% in October, the government said Tuesday, and core sales
—excluding autos, gas, building materials and food services — rose
by 1.6%, also stronger than expected.

Rising prices are only part of the story; even after adjusting
for inflation, consumer spending is higher than it was
pre-pandemic. “In spite of depressed sentiment numbers, Americans’
appetite for more stuff is unrelenting,” J.P.Morgan economist
Michel Feroli wrote in a note to clients Tuesday, adding that “the
level of retail sales in October surpassed the previous
stimulus-check-fueled high from this March, and stands 23% above
the January, 2020 level.”

After the retail sales numbers were released, J.P.Morgan raised
its projection for fourth-quarter GDP growth from 4.0% to 5.0%.

626,000: The government’s monthly jobs reports “sharply
underestimated” employment gains for most of this year, The
Washington Post’s Andrew Van Dam
reports.

The Bureau of Labor Statistics regularly revises its jobs
reports to factor in additional data and tweak seasonal
adjustments, so the revisions themselves are nothing extraordinary
— but the magnitude of the changes has been historic. For just the
four months from June through September, the Bureau of Labor
Statistics has since raised its initial estimates of jobs added by
626,000, “the largest underestimate of any other comparable period,
going back to 1979,” Van Dam writes. “If those revisions were
themselves a jobs report, they’d be an absolute blockbuster.” The
updated numbers make the August and September jobs gains look much
less dismal than initially thought.

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