Congress

A Tax Break for the Rich Could End up Being the Largest Part of the 'Build Back Better' Plan

Removing the cap on the state and local tax deduction would be a massive tax break for wealthy Americans who choose to live in high-tax states.

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President Joe Biden's "Build Back Better" plan was pitched as a once-in-a-generation rebalancing of America's socioeconomic scales. Democrats were going to "Tax The Rich" and use the proceeds to fund a massive expansion of government benefits for everyone else.

Now, the package appears likely to deliver an overall tax cut for America's wealthiest citizens.

In large part, that's because Democrats now plan to fully repeal a cap on the state and local tax (SALT) deduction. The cap, imposed as part of the 2017 federal tax reform law, allows Americans to deduct up to $10,000 in state and local tax payments from their federal taxes. That cap is high enough that it covers the vast majority of Americans, but the changes made in 2017 meant that wealthy Americans could no longer take advantage of a sort of backdoor subsidy that eased the burden of living in a high-tax state or locality.

Unsurprisingly, restoring the SALT deduction (or at least raising the cap) has been a priority for lawmakers from California, New Jersey, New York, and other high-tax states. It appears they will get their way.

There's no way around it: Removing the SALT cap is a huge tax break for a small number of very wealthy Americans. According to the Tax Policy Center, only about 9 percent of households will see any benefit from repealing the cap. The wealthiest 1 percent of American households will receive 56 percent of the benefits.

Meanwhile, "approximately 99 percent of the decrease in tax liability accrues to taxpayers with $100,000 or more of economic income," according to the Joint Committee on Taxation, an independent number-crunching agency housed inside Congress.

Including the SALT cap repeal in Biden's revised "framework" would transform the overall package into a $30 billion net tax cut for the wealthiest 5 percent of Americans next year, according to a recent analysis from the Committee for a Responsible Federal Budget (CRFB), a nonprofit that advocates for reducing the budget deficit.

"A five-year repeal would cost roughly $475 billion, with $400 billion of the tax cut going to the top 5 percent of households," the CRFB concluded. "That is more than any other part of Build Back Better, including the Child Tax Credit, spending on child care and pre-K, climate-related tax credits, or health care funding."

There's nothing inherently wrong with cutting taxes, of course, and the wealthy already pay a disproportionately large share to the federal government. But the SALT deduction is problematic on libertarian grounds because how much you pay to your state government should not affect how much you owe to the federal government. Wealthy residents of California or New York who want to pay less in taxes should move to a lower-tax state or vote for politicians who will cut taxes—not have their tax bills subsidized by residents of other places.

It's also bad policy because the SALT deduction effectively serves as a subsidy for state governments that impose high taxes. Because residents of those states do not have to bear the full burden of their state and federal taxes, politicians in those places are insulated against the political costs of approving expensive and often wasteful projects. And abolishing the SALT deduction has for years been part of bipartisan plans to overhaul federal tax-and-spending policies.

It's notable that repealing the SALT cap was not something Biden included in the framework he announced on Friday. Almost immediately, however, there were reports that Democratic leaders were giving assurances to their members that the SALT cap repeal would be included in the final package. Those rumors were finally confirmed on Tuesday by Rep. Josh Gottheimer (D–N.J.), a longtime advocate for repeal.

It's no wonder why Biden and other Democrats were trying to keep the SALT cap repeal a secret. Its inclusion makes the overall package significantly less attractive to progressives—possibly even unprogressive in their eyes, given the overall cost of the SALT cap repeal and the thin slice of well-to-do Americans who benefit from it. And studies show that repealing the SALT cap might also make housing even less affordable, cutting against another professed goal of Biden's supposedly progressive agenda.

With the inclusion of the SALT cap repeal, Biden's "Build Back Better" plan would "do more for the super-rich than it does for climate change, childcare, or preschool," tweeted Jason Furman, the former chairman of President Barack Obama's Council of Economic Advisors. "That's obscene."

"The last thing we should be doing is giving more tax breaks to the very rich," Sen. Bernie Sanders (I–Vt.) tweeted on Tuesday. "Democrats campaigned and won on an agenda that demands that the very wealthy finally pay their fair share, not one that gives them more tax breaks."

Given the haphazard negotiations between Congress and the White House in recent weeks over a bill that increasingly seems likely to be Biden's best shot at passing a major set of domestic policies before the midterm elections, there's no way to know what will happen next. Advocates of the SALT cap repeal seem fairly confident of getting their way, but progressives, or the White House, could still force a change of direction.

After all, progressives in the House of Representatives have already had to swallow the removal of a politically popular paid leave program from Biden's agenda on the grounds that its inclusion was too expensive. The paid leave problem would have cost an estimated $540 billion over 10 years, while the SALT cap repeal will "cost" (in the form of reduced revenue) about $475 billion over just five years, according to CRFB's analysis.

A few days after paid leave was discarded, Democrats are now promising to shovel big bucks into the bank accounts of some of the wealthiest people in America. That progressive takeover that we've heard so much about doesn't seem to be going according to plan.