One of the little covered aspects of the debate over the current stimulus bill is Democrats acting as proponents of repealing the $10,000 limit on State and Local Tax (SALT) deductions. For politicians whose left flank is screaming to tax the rich, this is a truly odd, but utterly explainable, phenomenon.
When Republicans passed the Tax Cut and Jobs Act, the standard deduction was increased significantly. This increase meant that for most taxpayers, including upper-middle-class earners, the best strategy was to take the standard deduction rather than itemize. The only individuals who take the SALT deduction are those who itemize.
The Tax Foundation estimated that only 13.7% of taxpayers would itemize in 2019. The vast majority of itemizers are in the top 10% of income earners. These households include those who earned $184,200 or more in 2019. These taxpayers would be allowed to deduct their state and local tax amounts from their federal tax obligation.
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The rub is that in many Democrat-run states, like New York and California, wealthy residents pay far more in state and local taxes than the $10,000 limit. In 2019, New York Governor Andrew Cuomo got very mad at Florida for stealing some of his wealthiest residents. Facing down a $2.3 billion budget shortfall, he actually went to Washington, D.C., to ask President Trump to reconsider the SALT deduction cap.
At the time, Governor Cuomo stated that the top 1% of earners in New York paid nearly 50% of the state’s taxes. He reiterated that recently when he told reporters he is begging wealthy New Yorkers to return home from their COVID-19 getaways. Not many are biting.
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Of course, the SALT cap was not repealed. And President Trump was one of the wealthy residents of New York City who changed his permanent address to his property in Florida, citing the tax benefits. He would save not just on property taxes, but also inheritance taxes on his estate that would affect his children and grandchildren.
When Democrats took the House, they did put forward a bill to repeal the SALT cap. However, even Alexandra Ocasio-Cortez (D-N.Y.) saw what was going on. She voted against the repeal because she recognized it was tax relief for the very wealthy.
This policy preference is a pretty interesting position for a party whose presidential candidates have embraced a wealth tax. Even nominee Joe Biden has talked about taxing the 1% in the past. The reason the party wants to repeal the limit is that it completely exposes just how high state and local taxes are in deep-blue states and cities.
Currently, Washington State is the only Democrat trifecta that does not have state tax. Property taxes are generally under local control, and some large blue cities like New York City and San Francisco also tax income. The wealthy in these jurisdictions are now paying a higher federal tax because the SALT cap is less than their state and local tax bills.
The bottom line is that Democrats have been holding up a bill meant to extend unemployment benefits and other pandemic assistance on order to benefit wealthy taxpayers in blue states. Irony anyone? Senate Majority Leader Mitch McConnell pointed this out on Twitter:
We need to urgently help working families and those who’ve lost their jobs. But the Speaker and the Democratic Leader are blocking the entire rescue package over a special, unrelated tax cut for rich people in high-tax blue states.
— Leader McConnell (@senatemajldr) August 4, 2020
As it turns out, high state and local taxes likely have chased out most of the residents specifically focused on the SALT issue. Now deep-blue urban centers are dealing with people leaving due to a preference for more open space following the pandemic and rapid increases in violence.
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New York State is currently facing a $30 billion shortfall. Likewise, California’s is projected at $54.3 billion, and Illinois is projecting up to $6.9 billion. As residents balance some of the most draconian lockdowns in the country, the risks of living in close quarters, and the rising crime rates, it is unclear whether the SALT cap is their first consideration.
So Democrats are holding up aid in a desperate bid to but a band-aid on an arterial bleed. Perhaps they may consider rejecting their radical-left base and securing their cities, or basing their public policies on science related to COVID-19 rather than pure political agendas.
The last resort would be their deep-blue-state governors and mayors learning the meaning of the word austerity in the face of an economy ravaged by a pandemic. Somehow, that seems like a long shot.
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Correction: An earlier version of this article incorrectly stated the deficit total for Califonia. The article has been updated to include the correct number, $54 billion.
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