Congressional Democrats are finalizing a half-trillion-dollar tax cut for the wealthy, a provision larger than any new welfare program in the budget reconciliation.
Reinstating the State and Local Tax (SALT) deduction will cost an estimated $500 billion, more than 2.5 times the size of the child tax credit and earned income tax credit combined. The provision allows taxpayers to deduct the amount they pay in state and local income, property tax, and sales tax from their reported federal income. Under the 2017 GOP tax cut, the SALT deduction was capped at $10,000. The Democratic plan would make it unlimited for five years.
Nothing else in the $1.75-to-1.85-trillion proposal carries such a large price tag. A new program for universal pre-K and affordable child care costs $400 billion. Investments in affordable housing costs $150 billion, and expansions to Medicare and Medicaid cost $165 billion.
The inclusion of the SALT deduction is a win for such Democrats in high-tax states as New Jersey representative Josh Gottheimer, who said he will not vote for the rest of President Joe Biden's budget unless it included tax relief for wealthy individuals in his district. But it remains to be seen if progressives will support such a proposal, which has already been significantly pared back from its initial $3.5 trillion price tag.
States such as New York, New Jersey, and California have top marginal income-tax rates above 10 percent, generating extraordinary revenue for the state's budgets. Critics of the SALT cap say it makes it harder for those states to hike taxes further without risking the wealthy leaving.
"The cap on the SALT deduction remains a punishing blow to our home states of New York and New Jersey and we work to recover from the pandemic and get our economies on strong footing and our constituents back to work," Gottheimer, Rep. Tom Suozzi (D., N.Y.), and Rep. Mikie Sherrill (D., N.J.) said in a Tuesday statement.
Roughly $400 billion of the expected loss of revenue from reinstating the SALT deduction would go to the top 5 percent of households, who in many states pay more than $10,000 dollars in annual local property and income taxes, according to estimates from budget and tax experts.
A study from the Committee for a Responsible Budget found that the SALT cap repeal would give an annual $60,000 tax cut to households making over $1 million a year. Households that make less than $100,000 would see virtually no benefit.
"Repealing the SALT cap would worsen, not solve, two of the biggest criticisms of the [2017 GOP tax cuts]—that it lost too much revenue and offered too much to high earners," the study reads. "It would also almost quintuple the size of the SALT tax break and add complexity by increasing the number of Americans who itemize their deductions."
The regressive nature of the tax cut raises questions about whether it will receive support from members of the left-wing "Squad" and other progressive Democrats. Rep. Alexandria Ocasio-Cortez (D., N.Y.) in April called the SALT deduction a "gift to billionaires."
As negotiations over the bill between wings of the Democratic Party began breaking down in September, however, Ocasio-Cortez tweeted that she's open to "taking a look at SALT and addressing concerns for families put under the squeeze in high cost of living areas," though she stopped short of endorsing a full repeal of the cap.