While many lawmakers in Washington DC scream at the top of their lungs about “the rich not paying their fair share of taxes” (which is not true by the way, as I wrote in May of this year) and waive their arms in anger, they hope that you don’t notice what they are also advocating for – a massive tax break for the wealthy. Yes, you read that right. Let me explain.

For many years before 2018, taxpayers could deduct their state and local taxes (hence the acronym SALT) against their federal income tax liability. So, for example, if you owed $30,000 in state and local taxes, you could deduct that amount against your federal income, providing you a very large tax break on the federal level. The overwhelming majority of taxpayers that benefit from this tax break are the wealthy, since they typically have very high state tax burdens. 

As part of the 2017 federal tax reform, lawmakers capped that deduction at $10,000, which mostly eliminates that tax break for the wealthy.

As part of the ongoing battle in Washington DC over the massive $3.5 Trillion dollar budget reconciliation bill being pushed by President Biden, Speaker Pelosi (CA) and Majority Leader Schumer (NY), an elimination of the $10,000 SALT cap has been included in the proposed policies included in the bill. Repealing the SALT cap would cost the Treasury roughly $85 billion per year, and about $350 billion in total before the cap (along with other parts of the 2017 Tax Cuts & Jobs Act) expires in 2026. Each dollar spent on SALT cap repeal is either unavailable for other priorities in reconciliation or must be financed with additional tax increases or spending cuts.

The $85 billion annual cost of repeal is more than five times larger than the President’s universal preschool plan, almost eight times as large as providing free community college, and over three-quarters as large as the cost of extending the expanded child tax credit. Meanwhile, the annual average cost of SALT cap repeal is two and a half times larger than the average annual revenue raised from increasing the top marginal income tax rate to 39.6 percent and 20 percent larger than the average annual revenue generated by raising the corporate tax rate to 28 percent.

After spending the last four years constantly complaining about Republican ‘tax cuts for the rich,’ it is oddly hypocritical that Democrats would now want to shepherd through their own massive tax cut for the rich.

This single policy virtually eliminates all of the cost benefit of the major tenets of the bill in a tax break for the wealthy that mostly flows to taxpayers in high tax states like California and New York. It just so happens that those two states are the homes of Speaker of the House Nancy Pelosi and Senate Majority Leader Chuck Schumer. Go figure.