How Democrats Can Get Out of SALT Mess and Save $ 1,000 Billion

The debate among Congressional Democrats over the $ 10,000 cap on the State and Local Tax Deduction (SALT) continues. We are proposing here a proposal that could bring something to the SALT caucus in the short term; save nearly a trillion dollars over the budget window; and put the tax system on the path to greater fairness.

The two options considered apparently consist of remove the cap for two years Where raise the ceiling to a higher amount over ten years.

These are two very bad ideas, wasting money on very regressive tax relief. If we are forced to choose, we should say that the first is even worse than the second. Especially if cuts are to be made on other political fronts, many of which would help less fortunate families, this will be difficult to justify. We criticize here the proposals that seem to be on the table, before describing our own.

The complete repeal of the SALT cap is the worst option of all

Repealing the SALT cap for two years would cost around $ 85 billion per year. Like us and others As has been pointed out many times, this represents a massive boon for the rich and the haves. Despite what the SEL Caucus claims, the repeal of the SALT cap is no tax cut for the middle class. Ninety-six percent of profits would go to the richest 20 percent of the income distribution, with the richest 0.1 percent receiving a tax cut of $ 154,000 per year, on average . To be fair, the middle class gets something. The middle 60% of the income distribution would benefit, on average, from a tax cut of $ 37 per year. Even in high tax states, the middle class receives little. In new York, the richest 1% would benefit from a tax reduction of about $ 103,000 on average. For those in the middle class, the benefit is only $ 90, on average. The repeal of the ceiling is therefore regressive and brings little or no social benefits. As budget-wrestling Democrats know, there are dozens of better ways for the federal government to spend $ 85 billion, for example:

1. A panoply of social policies. We can’t say it better than Maya MacGuinea, Chairman of the Committee for a Responsible Federal Budget: “For the annual cost of repealing the SALT cap, policymakers could adopt the president’s plans to provide a universal preschool, free community college, paid family leave, affordable child care and an Income Tax Credit Extension. Not just one of these policies, but all of them together. “
2. One year of extended child tax credit (CTC). As part of the American Rescue Plan, the CTC was expanded and made fully reimbursable – meaning low-income families can receive the full benefit – for one year. The annual cost of this extension is approximately $ 100 billion compared to the previous law. From June to July, the expanded CTC reduced monthly child poverty by 25 percent. The expanded CTC is also likely to stimulate long-term social mobility, as we have argued earlier.
3. Double (or even triple) the Pell Grants. Pell scholarships help students from low-income families pay for their college education. On our own pages, Philip Levine finds that doubling the maximum amount of the Pell grant is a rare win-win policy: it promotes economic efficiency and social equality. Matthew Chingos of the Urban Institute estimates it would cost around $ 35 billion per year, roughly doubling the current cost. A calculation on the back of the envelope suggests that the maximum amount could even be tripled (with the remaining money) for the same price as the repeal of the SALT cap.
4. Universal ties for babies. The racial wealth gap and the gap between blacks and whites in multigenerational poverty is alarming. Racist policies have helped create these gaps, and intentional public policy is needed to close them. One option is baby ties. In fact, for a children’s trust fund that will provide the most assistance to people from low-income families, this proposal would, on average, benefit black beneficiaries particularly. The government would put money into accounts for children at birth, which would grow over time thanks to continued government contributions and secure returns on investments. At the age of 18, beneficiaries access these funds to pay for their education or a down payment on a house, for example. With many potential structures, baby bonds would cost around $ 82 billion per year.

People can reasonably disagree on the pros and cons of these various policies. But it’s hard to argue that either of them is a worse way to spend taxpayer money than a tax break for the rich is a better use of that money.

Raising the ceiling is also a bad idea

The second option under consideration, raising the cap to a certain higher dollar threshold, is still regressive. If the cap were raised to, say, $ 30,000 for couples and $ 15,000 for singles, more than two-thirds of the benefit would go to the richest 5 percent of the income distribution, and less than 4 percent to the middle 60 percent. Even in states with high taxes, the rich reap most of the benefits. In new York, almost half of the profits would go to the richest 5%.

Recent reports indicate Democrats are drawn to the income neutral potential of raising the cap. Since the $ 10,000 cap is due to expire at the end of 2025, keeping the cap in place for the past few years would generate significant revenue, compared to current law. In other words, the initial costs would be paid by subsequent income. It’s a good idea to think longer term, but there is still a better approach; which is not only revenue neutral, but fundraising.

Raise the ceiling and then gradually eliminate it: a victory, a victory, a victory?

If the Democrats really must do something about SALT, they should consider raising the cap (not eliminating it) and then gradually reducing it to $ 0 over ten years. For example, they could increase the limit to $ 20,000 for married couples applying jointly and keep the limit of $ 10,000 for singles. This would give some short-term relief to families with state and local tax bills slightly above the current limit. Again, we don’t think it’s necessary, but there is clear political pressure for something here.

Each of these limits could then be reduced annually by $ 2,000 and $ 1,000, respectively, to eventually reach zero. By 2032, while the SALT deduction would still technically be in the tax code, it would have effectively been removed completely, which we argued previously.

The advantage of this approach is that rather than removing the cap overnight, it is phased out. This allows time for households and the housing market to adjust. It would also give time to put in place alternative and superior means for the federal government to support states, such as the State macroeconomic insurance fund proposed by Len Burman, Tracy Gordon and Nikhita Airi of the Tax Policy Center. It should be noted that the UK has taken a similar approach with its version of mortgage interest deduction, reducing its value in successive years from 1994 to 2000 (and note that there was a change of government in 1997).

Gradually reducing the value of the deduction over a full decade would provide much needed political stability in an area that could otherwise become political football for years to come. Compare our phase-out proposal with the SALT cap timeline if Democrats decide on a temporary full repeal:

• No SALT cap until 2018
• A SALT limit of $ 10,000 from 2018 to 2021
• No salt cap from 2022 to 2023
• A SALT limit of $ 10,000 from 2024 to 2025
• No salt cap from 2026

This sequence could appear on the first page of a manual titled How not to make tax policy.

Our proposal would also raise funds. We estimate that raising the cap from $ 10,000 to $ 20,000, and then phasing it out, would bring in about $ 900 billion over the ten-year fiscal window. The reason the savings are so big is that the SALT cap is currently slated to expire at the end of 2025, so our proposal to continue eliminating it instead results in big savings.

Hopefully the approach we are proposing here, which takes a long-term view of how to deal with a regressive tax deduction, while acknowledging current political pressures, might find bipartisan support as well.

In short, our proposal would bring some political stability, give SALT-focused members a short-term victory, make the tax code simpler and fairer in the long run, and generate a lot of income for important progressive goals. How does that sound?