Democrats’ ‘SALT’ headache hangs over budget reconciliation bill

Independent analysts say House plan would cut taxes for the rich; Senate proposal would phase out tax break for higher incomes

Sens. Bob Menendez, D-N.J., right, and Bernie Sanders, I-Vt., arrive for a news conference on the state and local tax deduction in the U.S. Capitol Nov. 3.  (Tom Williams/CQ Roll Call)
Sens. Bob Menendez, D-N.J., right, and Bernie Sanders, I-Vt., arrive for a news conference on the state and local tax deduction in the U.S. Capitol Nov. 3. (Tom Williams/CQ Roll Call)
Posted November 16, 2021 at 5:00am

Democrats set out to pay for their massive clean energy and social spending package with tax increases on the wealthy, but a parochial desire among lawmakers from high-tax states to provide relief from a $10,000 cap on state and local tax deductions has undermined that goal.

Any adjustment risks providing a windfall to wealthy taxpayers that they otherwise wouldn’t get under Democrats’ budget reconciliation bill. That’s why House lawmakers waited until the last minute to work "SALT" relief into the package and why there’s not a final agreement with the Senate on the best approach.

“Whatever they do on SALT is likely to scale back the tax increase on high-income households,” Kyle Pomerleau, American Enterprise Institute senior fellow for federal tax policy, said.

The latest House version, which the chamber is expected to vote on this week, would raise the $10,000 cap to $80,000 and extend its life by six more years, with the cap snapping back to $10,000 in 2031 before expiring.

SALT-conscious House Democrats from New Jersey and New York who wanted to fully repeal the cap said they could live with that version, but it’s not one many Democrats love.

One of the biggest opponents is Senate Budget Chairman Bernie Sanders. The Vermont independent teamed up with New Jersey Democrat Bob Menendez on a Senate alternative that would make the $10,000 cap permanent but exempt individuals earning up to at least $400,000.

Sanders said their proposal is better targeted toward working families in high-tax states and is designed to prevent a net tax cut for the rich, unlike alternatives to fully repeal or significantly lift the cap for all income groups. "That would be unacceptable," he said.

Sanders and Menendez have yet to release a detailed proposal or income threshold for phasing out their cap exemption. Sanders likes $400,000, the threshold President Joe Biden has promised his tax increases will not cross, and Menendez prefers $550,000, which he said would cover 99 percent of New Jersey taxpayers.

Menendez said Monday a decision on the income threshold would be based on what provides a revenue-neutral SALT fix, which he didn't yet know.

'Even worse'

Whatever the threshold, experts say the Sanders-Menendez plan is superior because it won’t provide as sweeping of a tax cut for the wealthiest households.

Jason Furman, who served as former President Barack Obama’s top economic adviser, tweeted Thursday that the distributional effect of the House’s $80,000 SALT cap “is even worse than I had feared," citing a Tax Policy Center analysis released earlier in the day.

“This could be greatly ameliorated by adding an income limit for the expansion of the cap so that no one making over a middle-class income, broadly defined, gets it,” Furman said. “Some Senators have been talking about this, I hope they do it.”

The TPC analysis shows the benefit of the $80,000 cap for those cut off from relief under the Sanders-Menendez proposal: Households earning between $500,000 and $1 million next year would receive an average tax cut of $6,100 under the House bill.

And while overall households earning over $1 million next year would see tax increases totaling about $68,000 on average, within that group nearly two-thirds of millionaires would still see tax cuts worth nearly $16,800.

Tax cuts for higher earners wouldn’t span the full decade under the House plan because it extends the cap past its current 2025 expiration. That means later in the decade, the $80,000 cap would be a burden, rather than relief.

The TPC found tax cuts would be widespread in 2022 because of the one-year extension of the expanded child tax credit. But when that expires and corporate tax increases kick in starting in 2023, taxes would on average rise very slightly for many middle- and upper-income Americans.

Taxes would climb more widely in 2026, when the individual cuts from the 2017 GOP tax law are set to expire and the SALT cap would be extended under Democrats’ plan.

“Overall this really does kind of fit the model: raise taxes for high-income people and corporations and cut them for middle-income and low-income people. But the SALT change really does matter a lot for those people in the 95th to 99th percentile,” TPC senior fellow Howard Gleckman said.

The top 95 to 99 percentile of earners, making roughly $369,000 to $885,000, would get an average tax cut of $4,350 in 2022 under the House plan, the TPC found.

'An improvement'

Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget, doesn’t think lawmakers should be tinkering with the SALT cap at all because even income exemptions are “going to be regressive within the universe that it defines.”

But he said the Sanders-Menendez proposal is “an improvement over the $80,000 cap” because it means no tax cuts for “the very, very rich” even though it lowers taxes for people with relatively high income.

While Biden promised not to raise taxes on anyone making below $400,000, Goldwein argues most Democrats didn’t intend to provide tax cuts to those making near that amount. And because SALT is a deduction, a person with more income and thus a higher marginal tax rate gets a bigger tax cut.

“I just don't think that's what the majority of the party wants,” Goldwein said.

Steve Wamhoff, director of federal tax policy for the Institute on Taxation and Economic Policy, said lifting the cap to $80,000 “provides tax breaks that mostly go to the richest 5 percent and almost entirely go to the richest 20 percent.”

While the Sanders-Menendez proposal would also help some in richest 20 percent, it “would be less regressive than basically any other alternative,” Wamhoff said. “And that's coming from the senator whose state is most affected by the SALT cap.”

Surtax dial

Several Democrats said that if the added SALT relief were to show a net tax cut for the wealthy, they could adjust the dial on a high-income surtax to provide more offsetting tax increases.

The latest version of the bill includes a 5 percent surtax on income above $10 million with an additional 3 percent on income above $25 million. That may be one of the reasons about one-third of millionaire households in the TPC analysis would see steep overall tax increases in 2022, totaling more than $228,000.

Sen. Chris Van Hollen, D-Md., and Rep. Donald S. Beyer Jr., D-Va., who authored a surtax bill beginning at $1 million, both said the income threshold could be lowered to compensate for SALT relief.

“That's one of these things that can be adjusted based on what we need to do,” Van Hollen said.

New York Democratic Rep. Tom Suozzi, one of the lawmakers pushing for the $80,000 cap, agreed. “The surcharges that we’re doing on high earners is a way to alleviate some of this,” he said.

Pomerleau said the surtax would have to hit below $1 million to offset the net tax cut for the 95th to 99th percentile of earners.

It’s unclear if a surtax that low could get enough support to clear the Senate, where Democrats can’t lose a single vote, given that the House’s original proposal for a surtax on income over $5 million did not survive bicameral negotiations.

'Eye of the beholder'

Not all Democrats are concerned about the distributional impacts of SALT relief.

Rep. Mike Thompson, D-Calif., who chairs the Ways and Means tax subcommittee, said that’s “in the eye of the beholder” because the wealthy individuals who would get tax cuts from more generous SALT deductions already pay more into their state coffers.

Some of those high-tax states, like Thompson’s home state, have implemented more liberal climate and social spending policies Democrats are trying to replicate at the federal level.

“Some of these places where there are high-income individuals — those are areas that have spent money on programs that are important in the area … because there’s a lack of involvement by the federal government,” Thompson said.

But for Democrats from states where SALT is not as much of an issue, the relief is a hard pill to swallow, especially after Arizona Sen. Kyrsten Sinema’s opposition to raising rates eliminated Democrats’ plan to take the top individual rate back up to 39.6 percent and to raise the capital gains rate to at least 28 percent.

“There's — no question for me and probably for a lot of people — some frustration that there isn't the same construct that we had,” Sen. Bob Casey, D-Pa., said. “But we're in this position where we have to get to 50 votes and that changed the dynamic on revenue.”

Republicans have already started attacking Democrats on the issue. Ways and Means ranking member Kevin Brady, R-Texas, said Democrats’ plan to raise the SALT cap serves as a “tax haven” against other increases in the bill.

“I’m surprised Democrats are prioritizing a huge tax windfall for millionaires and billionaires over some of the other priorities they began with,” Brady said.

But Democrats say GOP attacks aren’t driving their policy decisions.

“They're going to hit us [regardless],” Rep. Dan Kildee, D-Mich., said. “If we turn lemons into lemonade, they would complain about the taste.”