A tax cut for the "merely wealthy" finds bipartisan support in Congress

Self-described moderates in the GOP are rallying behind a policy favored by centrists of both parties and which economists consider a major tax cut for America’s “merely wealthy” professionals. At the same time, President Donald Trump, who is now attempting to push through the bill as is, appears to have flipped on the issue multiple times.

In the current GOP budget bill, expected to go to a floor vote as soon as this week, GOP “moderates” appear to have successfully tacked on a major increase to the State and Local Tax Deduction cap, a policy that allows households to deduct their state and local taxes on their federal tax filings.

As it stands, the SALT deduction cap is set at $10,000. House Speaker Mike Johnson, R-La., now says that he’s reached a deal with a group of Republicans hailing from New York, New Jersey and California to raise the SALT deduction cap to $40,000.

The issue of raising the SALT cap has long been a hobby horse for both Republicans and many Democrats from the three states, with proponents of the policy, like Rep. Mike Lawler, R-N.Y., claiming that it’s an affordability issue in their districts.

“We want to be able to provide real tax relief to middle-class and working-class families,” Lawler told News 12 Westchester.

Democrats like Rep. Tom Suozzi, D-N.Y., have also championed the issue, with Suozzi saying at a press conference Wednesday that he supports eliminating the SALT cap as a way of encouraging wealthy New Yorkers to stay in the state instead of leaving to lower tax states like Florida. He also said he supports raising the top marginal federal tax rate alongside any change to SALT to prevent the change from being a tax break for the wealthy.

The current version of the GOP bill contains no such provision to recoup tax revenue lost through an increased SALT deduction cap.

Trump has met with congressional Republicans to pressure them to accept the current form of the bill, a pivot from his campaign promise of "restoring the SALT deduction." Earlier this week, Trump slammed the changes to SALT saying, "The biggest beneficiary, if we do that, are governors from New York, Illinois and California." In Trump's first term, he and the Republicans oversaw the lowering of the SALT cap to $10,000, which at the time was considered a slight against states like New York, California and other Democratic states where taxpayers disproportionately take advantage of the SALT deduction.

The problem for members from both parties, however, is that the policy has almost nothing to do with middle-class and working-class families, but everything to do with some of the highest-income households in the United States.

Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, said in an interview with Salon that for the vast majority of tax filers, even in states with higher tax rates like New York and California, the SALT deduction “doesn’t do them any good.”

The main reason the SALT deduction doesn’t matter for most filers in these states, Gleckman said, is that few households have enough yearly income for raising the cap to have much or any impact on the taxes that they will have to pay.

“Remember that many states have essentially a flat income tax, so it doesn't make a lot of difference if you're making $100,000 a year or making a million dollars a year, you're paying essentially the same state income tax rate. Think about the number of people who are paying $30,000 or more in [state or local] taxes. It's just not a lot of people,” Gleckman said.

An analysis of various proposals for raising the SALT cap performed by Gleckman and the Tax Policy Center earlier this year divided up American households by income to calculate who stood to benefit the most from raising the SALT cap. The analysis, which used raising the SALT cap to $20,000 for the purposes of the analysis, found that the policy would overwhelmingly benefit the top 20% of households by income.

The analysis also found that Americans in the bottom 60% of households by income would see little to no changes in their taxes paid, while Americans in the fourth quintile of income would see a modest decrease in federal taxes paid. In real terms, this means households making $200,000 or less a year would see basically no change in their after-tax income.

Meanwhile, households making between $430,000 and $1 million a year, which represent the top 95% to 99% of earners, would see a substantial tax cut, and collect around 90% of the benefit of an increase in the SALT cap.

Members of this group aren’t members of the super-wealthy; Gleckman referred to them as the “merely wealthy.” Gleckman said that people should think about professionals like partners at law firms, doctors or very successful business owners as being representative of this group.

To be clear, the proposal percolating in Congress goes beyond the $20,000 cap used in the model, with Congress apparently on track to pass a $40,000 cap, increasing by 1% every year for ten years. Politico also reports that Republicans are looking to limit the new cap to households making below $500,000 a year, though how exactly this would work remains unclear.

Michael Madowtiz, an economist at the Roosevelt Institute, pointed out that in order to even take advantage of the SALT deduction, people need to be in a situation where itemizing their returns makes sense, which isn’t the case for most American households.

Madowtiz said that, although you could imagine situations where there are households with two working parents in high-cost-of-living areas like Manhattan, where they might be able to take advantage of a higher SALT cap while not being considered wealthy for their area, though he said that this is “deeply stretching the definition of middle class.” He also noted that these members of the “professional class” in urban areas were exactly the people Republicans were trying to “stick it to” in 2017, when they imposed the $10,000 SALT cap.

“For most families, SALT is irrelevant because the sales taxes they pay aren't even eligible for a SALT deduction," Madowitz added, "so you have to be in pretty rarified air before this is even about you.”