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SALT Still Rubs the Democrats’ Tax Wounds

Getting to a unified agenda on taxes won’t be easy for incoming majority

Virginia Democrat Jennifer Wexton criticized the the GOP tax overhaul for capping the SALT deduction used by many residents of her 10th District. But undoing the cap would create new complications for Democrats, Cohn writes. (Bill Clark/CQ Roll Call file photo)
Virginia Democrat Jennifer Wexton criticized the the GOP tax overhaul for capping the SALT deduction used by many residents of her 10th District. But undoing the cap would create new complications for Democrats, Cohn writes. (Bill Clark/CQ Roll Call file photo)

ANALYSIS — A strange dilemma for the incoming majority House Democrats is encapsulated in a series of June tweets from Democratic candidate Jennifer Wexton on the six-month anniversary of the Republicans’ signature 2017 tax overhaul.

Rep.-elect Wexton, who ultimately defeated GOP Rep. Barbara Comstock in northern Virginia, wrote in an opening tweet that the bill “hurt working families by giving tax cuts to the wealthiest and blowing up our national debt.” In another, Wexton wrote that the law’s cap on state and local tax deductions “hits #VA10 families hard, yet @RepComstock still voted for the bill.”

But raising taxes on upper-end households while cutting taxes for the middle class quickly gets tricky when it comes to the so-called SALT deduction.

Virginia’s 10th District is among the nation’s wealthiest (median income for a two-earner household: $160,347). The tax law’s $10,000 limit on SALT deductibility is a fraction of what the richest pay in states like California, New York and New Jersey, and even relatively lower-taxed Virginia. And it’s why top earners in some places are more likely to be worse off now than before the law passed.

Uncapping SALT deductions would deliver 93 percent of the tax cuts to households earning more than $200,000, and nearly half to millionaires and billionaires, according to Urban-Brookings Tax Policy Center estimates.

Most households earning less than $200,000 would see no benefit, according to the TPC; those that do would average less than $1,000 — a figure the likely incoming speaker, Nancy Pelosi of California, has derided as “crumbs” — though the data don’t take into account regional disparities. Meanwhile, the average break for those in the top 0.1 percent of the income distribution, which starts at $3.3 million, would top $150,000.

“Repealing the $10,000 cap would be one of the most regressive tax cuts in American history, if not the most regressive,” one former top House GOP aide said.

Most households, including 87 percent of those earning between $50,000 and $200,000, will benefit from the law in 2019, according to the nonpartisan Joint Committee on Taxation. But they’re not necessarily feeling it yet. Meanwhile, those disappearing SALT deductions represent a tangible loss, a sentiment Democrats tapped into with gusto during the campaign.

Flashback: Wexton Win Was One of Tuesday’s First Flips

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Political shifts

And the 5.5 percent of households facing tax increases are probably clustered in high-tax districts like the ones that tossed out GOP representatives. “It doesn’t matter if you’re making $70,000 or $750,000,” said Rep.-elect Tom Malinowski, a New Jersey Democrat. “People of all income levels are getting screwed.”

Malinowski, an assistant secretary of State in the Obama administration, beat Rep. Leonard Lance, a five-term Republican whose vote against the GOP tax bill didn’t save him in the usually red 7th District. Malinowski has said he’ll back Pelosi for speaker after, in part, securing a promise to “address the SALT issue,” which he said was top of mind for his district’s voters.

“You cannot justify to any family in my district taking away this deduction to pay for, not a program or effort that’s vital to the economic health of our country or the national security of our country, but to pay for a corporate tax cut that’s primarily been used to buy back corporate shares on Wall Street,” Malinowski said.

A family of four earning about $150,000 in the 7th District, or close to the median, would see their tax bill cut about $3,000 under the law, based on IRS data for 2016. That’s after losing $6,000 in SALT deductions that would be over the new limit. Removing the cap would cut this hypothetical family’s taxes by another $1,300. The windfall rises substantially up the income scale, to $16,000 for a household earning $525,000, and $110,000 at $2.8 million.

Malinowski didn’t directly address whether SALT deductions should be limited for the wealthy. But he seemed to lean against it, noting, “There’s a good argument to be made that you don’t tax taxes,” or tax the same income twice. “That’s a principle that’s been part of our tax code for a very long, long time,” Malinowski said.

Another big issue is cost: Uncapping SALT could cost $620 billion over a decade, by TPC estimates. Malinowski said changes should be “fiscally responsible,” paid for by ending other “loopholes and deductions,” or by raising the corporate tax rate from its newly reduced 21 percent.

Democrats would create a different problem for themselves with some type of clawback of SALT deductions for the wealthiest: how to keep them from fleeing blue strongholds like California and New Jersey for lower-tax red states.

California’s outgoing Gov. Jerry Brown has noted, for instance, that the wealthiest 15,000 taxpayers there pay a quarter of the state’s income taxes. If the richest leave, who will pick up the tab? That’s a question Pelosi will have to weigh carefully as Democrats search for a unified agenda on taxes.

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