In 2017, the Trump Administration was able to sign its signature tax reform bill into law. The Tax Cuts and Jobs Act of 2017 was the first major overhaul to the tax code in decades, cutting both personal income taxes and corporate rates alike.
Also featured in the bill was doubling the standard deduction made available to taxpayers and capping the amount of state & local taxes allowed in itemized deductions. This is known as the SALT Cap. So, what did the SALT Cap do exactly?
“The Tax Cuts and Jobs Act passed by a Republican Congress in 2017 put a $10,000 cap on federal deductions for state and local taxes paid.
There was previously no limit on the deductibility of those taxes.”
In short, a taxpayer could write off the entire amount of state and local taxes paid on property taxes, for instance, prior to 2018. Prior to 2018, there was no limit of SALT write offs, which could also include income taxes paid.
Capping this write-off disproportionately affects high earners with expensive property tax bills, but ultimately saved the government considerably.
“The SALT limit deduction generated $77.4 billion during its first year, according to the Joint Committee on Taxation, and a full repeal for 2021 may cost as much as $88.7 billion, and more in future years.“
Still, many legislators, mostly Democrat, want the cap repealed or changed as Congress negotiates a multi-trillion-dollar reconciliation spending bill.
As Democrat Senator from New York, Tom Suozzi, recently stated, “No SALT, no deal. I’m confident we’ll get it done.”
This came as Democrat lawmakers rushed to convince the Biden Administration to keep the SALT repeal in their spending bill in October.
The Democrat agenda to repeal this cap can be traced at least as far back as last year, when Democratic Senate Leader from New York, Chuck Schumer, stated:
“I want to tell you this: If I become majority leader, one of the first things I will do is we will eliminate it forever. It will be dead, gone and buried.“
It is no coincidence that politicians out of the state of New York, as well as California representative, and House Speaker, Nancy Pelosi, have been the spearheads working to get the SALT Cap repealed.
Politicians representing high tax states know that capping SALT write-offs impacts their wealthier constituents directly. It is projected that roughly 90% of American taxpayers took the standard deduction in 2018 once it was raised, meaning most Americans could not itemize deductions greater than those allowances. Repealing the SALT Cap simply allows state governments to charge high taxes while allowing the taxpayer to write it off later. While the pros and cons of this system is debatable, the SALT Cap has left residents in these states to endure the pain of high taxation in their home states.
Ultimately, repealing the SALT Cap is a backdoor to providing wealthier Americans tax write-offs, which will likely cost the government tens of billions in tax revenues or more in the coming years. It would possibly blunt any benefit to nominally raising the tax rates for upper income Americans under the guise of “paying our fair share,” and is a political maneuver being proposed by those who represent high tax states as Americans continue to leave them in record numbers.
Image Credit: Photo by Jon Tyson on Unsplash
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