The Build Back Better framework released by the White House last week calls for tax increases on the richest families, including a surtax on multi-millionaires and billionaires.
Although it wasn’t addressed in the framework, some observers expect the package will eventually include a repeal of the $10,000 cap on the federal deduction for state and local taxes, known as SALT. Some Democrats have said they won’t vote for the legislation without action on the SALT cap, which has been a particular issue in California, New York, New Jersey and other high-tax states.
The bipartisan Committee for a Responsible Federal Budget found in an analysis released Friday that repealing the SALT cap would more than offset the planned tax hikes on the rich.
“A two-year SALT cap repeal — if included — would reduce taxes on the top 5% of earners by over $70 billion” in fiscal 2023, the CRFB said.
After factoring in the planned tax hikes on the rich, the package would translate to a $30 billion net direct tax cut for those in the top 5% when the SALT cap repeal is in effect, the analysis said.
The 2017 tax law signed by former President Donald Trump imposed a $10,000 limit on how much state and local taxes (including property taxes) that households can deduct from their federal taxes.
Larry Summers weighs in
More than 96% of the benefits from a SALT cap repeal would go to the highest-income 20% of households, according to a 2018 analysis from the Tax Policy Center.
“If lawmakers truly intend to raise taxes on high earners, SALT cap repeal makes that goal much more of a challenge,” the CRFB said. “Instead, a much more progressive and fiscally responsible decision would be to abandon SALT cap repeal.”
Former Obama economic adviser Larry Summers voiced concern about the tax implications of the legislation on Sunday.
“I am certainly no left wing ideologue, but I think something [is] wrong when taxpayers like me, well into the top .1 percent of income distribution, are getting a significant tax cut in a Democrats only tax bill as now looks likely to happen,” Summers, who served as Treasury secretary during the Clinton administration, wrote on Twitter.
The Build Back Better framework does call for new taxes on the rich.
That includes a 5% surtax on income over $10 million and an additional 3% levy on income above $25 million. The framework also closes loopholes that allow some affluent taxpayers avoid paying a 3.8% net investment income tax on earnings.
‘No SALT, no deal!’
Importantly, there are still many unknowns here, including whether and how Democrats will address the SALT cap. CRFB cautioned that the numbers in its estimate are “rough” and will change when a final score on the reconciliation package is released by the Joint Committee on Taxation.
New York Rep. Tom Suozzi indicated he expects Congress will act on SALT.
“No SALT, no deal! I am confident it will be part of the final deal,” the Democrat said in a tweet last week.
Strategists at Raymond James said if SALT is changed, the “most likely outcome” is that the legislation removes the SALT cap for two years, potentially with an income or total dollar limit.
“This is more of a budget math’ and political move which positions Democrats to deliver a temporary tax cut, especially to high-tax Democratic states,” Raymond James strategists wrote in a note last week.
In this scenario, the SALT cap would be eligible to return after the two years.
CRFB said the reconciliation bill “would almost certainly increase taxes on high earners if and when the SALT cap repeal expires.”