The buried boon to the wealthy in the Democrats’ tax plan

December 4, 2021

Washington, DC

TTry cramming a party’s entire agenda into one giant bill and a battle royal will ensue. Such is the case with the Democrats’ goal to put policies on poverty reduction, childcare, climate change, health care, higher education, preschool, tax reform and more into the Build Back Better (BBB) ​​Act, which was passed by the House of Representatives Representative on November 19th.

As the price dropped to $ 1.7 trillion over a decade, half what it was the first time, the hunger or squid games between progressives and moderates have grown fierce. (Against the united Republican opposition and without a vote in the Senate, a defection by the Democrats would undo the law.) This had benefited the moderates in particular, as Senators like Joe Manchin and Kyrsten Sinema have used their veto threats to weaken or some controversial CO2- Wipe out emission limits, a paid family vacation program, and tax increases for wealthy Americans and corporations. But a lesser-known faction, the SALT Caucus, may have made the best of it.

The SALT Caucus is named after the deduction of the “state and municipal tax”. The tax exemption, which dates back more than a century, allows taxpayers to deduct property and income taxes when filing with the federal government. For much of its history, that exception was limitless. That helped the wealthy, who faced heavy bills for their homes and incomes – and the high-income states with high taxes that received implicit subsidies from the federal government. The subsidy cost $ 369 billion (1.9% of GDP) in 2017. That year, it became less generous after Republicans passed a bill, signed by President Donald Trump, that capped the $ 10,000 per year deduction.

For most Americans, this had little effect. According to the Internal Revenue Service, 87% of tax returns don’t bother listing all of their exemptions, which would be less than the standard withholding ($ 12,000 for a single applicant in 2018). But lawmakers in high-tax countries like New York and California saw the reform not as a laudable attempt to tax the rich (which it did pretty well), but rather as a penalty.

The SALT Caucus was soon founded as a resistance movement. “This was specifically designed to tax states that tax people to support better schools and services,” said Tom Malinowski, a Democratic congressman from New Jersey and a member of the SALT Caucus $ 20,000 property tax. Days before the House of Representatives passed the BBB bill, the caucus secured an increase in the ceiling for deductible expenses from $ 10,000 to $ 80,000 for the next ten years.

This represents one of the largest expenditures of the pending draft budget. And it is steeply regressive (see chart). It divides the Democrats, who may still be pushing for significant changes in the Senate.

Over the next five years, the new SALT provision would cost the federal government an additional $ 275 billion over the current law. That’s far more than BBB plans to spend on child taxes and income-earning credits aimed at reducing poverty. Some proponents claim that the proposal will actually be deficit-neutral for the next decade, though it relies on an erratic budget game. The limit for SALT from the Trump era expires in 2026. Although a $ 80,000 cap will cost a lot by then, scorers post it as a tax increase (relative to full deductibility) from 2026 to 2031.

President Joe Biden has stressed that BBB is a plan to revitalize the middle class. So it is ironic, argues Marc Goldwein of the Committee on Responsible Federal Budget, a think tank, that one of the most expensive parts of it is “a big tax cut that the middle class and poor people don’t get.” all “. Almost all of the utility is focused on the very wealthy.

A model from the Tax Policy Center, another think tank, shows that the average benefit would be a measly $ 20 for the middle 20% of earners. But those in the top 20% would get an average tax cut of $ 2,100; the top 1% would receive a cut of nearly $ 15,000. Most of the benefits would go to Americans who make more than $ 500,000 a year. Less than 9% would go to Americans making less than $ 200,000.

This is not just “a colossal waste of money for a regressive, distorting tax break,” argues Richard Reeves of the Brookings Institution, another Washington think tank, but “a form of tax self-harm and thus political self-harm. Damage “. Jason Furman, a former economic advisor to Barack Obama, has called it” obscene “.

The topic reverses the usual positions on fair taxation. Mitch McConnell, the Republican Senate Leader, criticizes the “Bonanza for Blue State Millionaires and Billionaires” and the fact that the bill “provides a net tax cut for 89% of people who earn between $ 500,000 and $ 1 million” . Some Democrats argue that their own “maker states” deserve a break that messing around with “moocher states” doesn’t

It is uncertain whether the change will become law. For both the Democratic leaders in Congress, Nancy Pelosi of California and Chuck Schumer of New York (pictured), the settlement would be a boon to their home constituencies. But some Democrats are outraged. Michael Bennet, a Senator from Colorado, has called the idea “absurd”. Another fierce objector, Bernie Sanders, is pushing for the withdrawal to be limited to those earning less than $ 400,000 a year. He did not say whether he would be ready to torpedo the whole bill because of the measure.

The White House was embarrassed about the idea, which was not included in Mr. Biden’s original proposal. His press secretary recently gave this sounding endorsement: “The President’s excitement about this does not relate to the SALT trigger; it’s about the other key components of the package. ” ■

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This article appeared in the United States section of the print version under the heading “A Tax Plan for the Upper Class”

https://www.economist.com/united-states/2021/12/04/the-buried-boon-to-the-wealthy-in-the-democrats-tax-plan