Democrats’ lead witness at a Senate Finance Committee hearing Tuesday on inequality in the U.S. tax code agreed with GOP assertions that repealing the $10,000 cap on the deduction of state and local taxes would run counter to efforts to close income and wealth gaps.
Dorothy Brown, a law professor at Emory University in Atlanta, told the panel that tax deductions tend to favor white over Black households, particularly since it is mostly wealthier Americans who still itemize on their returns following changes made in the 2017 tax code. Before the tax law, one in four Americans itemized, but after the standard deduction was doubled, that fell to nearly one in 10, she said.
In that vein Brown concurred with panel Republicans in their opposition to repealing the $10,000 limitation on state and local tax deductions imposed by the 2017 law, which would deliver the biggest benefits to the richest households.
“Yes, and I would say perhaps you have read my testimony closely,” Brown told Sen. Bill Cassidy, R-La., in response to his question about whether she’d oppose Democratic efforts to repeal the “SALT” cap.
In her written testimony, Brown — author of a book entitled “The Whiteness of Wealth: How the Tax System Impoverishes Black Americans and How We Can Fix It” — targeted three major areas of the tax code: breaks for married couples, homeownership and retirement savings.
Brown said white couples are more likely to get a marriage “bonus” as joint filers since they’re more likely to have one spouse earning most of the income, while Black couples are more likely to have equally split earnings and thus be subject to higher rates.
And Black Americans are more likely to work for employers that don’t offer tax-favored workplace retirement savings plans, and if they do, are more likely to withdraw funds early, which incurs substantial tax penalties, Brown wrote, citing Employee Benefit Research Institute data.
The homeownership section of her testimony doesn’t explicitly mention SALT, which the 2017 law dramatically curtailed. But the deduction for property taxes was long a substantial benefit and still defrays some smaller costs for some homeowners, who typically skew whiter; according to census data Brown cited, in the fourth quarter of 2020 the homeownership rate for white households was 74.5 percent, versus 44.1 percent for Black households.
Brown also went after breaks like the mortgage interest deduction and the capital gains tax exclusion for home sales, which she said disproportionately benefits homeowners in white neighborhoods because that’s where the most home price appreciation is.
“The federal government should stop subsidizing a racist homeownership market,” Brown said in her written testimony.
Some House Democrats have grown increasingly vocal about linking a repeal or rise in the SALT cap to the proposed $2 trillion-plus infrastructure package.
Placing a limit on SALT deductions overwhelmingly hit blue states and that targeting was intentional, Democrats contend. Republicans have taken advantage of the disunity in the other party on this issue, pointing to a 2019 Joint Committee on Taxation estimate that 52 percent of the benefit from a repeal of the cap would go to those making $1 million or more a year.
Shay Hawkins, a GOP witness and former tax counsel to Sen. Tim Scott, R-S.C., agreed that benefits would flow overwhelmingly to the wealthy. “So there’s no intellectually honest argument to raise the SALT cap if your goal is to eliminate income inequality in the tax code,” he said.
‘First employee’ credit
Senate Finance Chair Ron Wyden portrayed Tuesday’s hearing as exploring ways to reverse the wealth gap widening measures of the 2017 law. Eighty percent of the individual benefits from that law went to white Americans, he said.
“If America’s busted old tax code excels at anything, it’s rewarding those who are fortunate enough already to have wealth,” said Wyden, D-Ore.
At the hearing, Wyden announced new legislation aimed at assisting owners of women- and minority-owned businesses in accumulating wealth.
The bill would create a new “first employee” tax credit that amounts to 25 percent of wages up to $10,000 in a year and $40,000 over a lifetime for the first employee a new business hires. It also would create a credit of up to 50 percent for investments made in a business majority owned by someone making less than $100,000 a year. The investment credit is for a maximum of $10,000 a year and $50,000 over a lifetime.
Cosponsors include Finance Democrats Benjamin L. Cardin of Maryland, Maggie Hassan of New Hampshire and Catherine Cortez Masto of Nevada. They said in a joint statement with Wyden that widely available tax credits are less likely to help women and people of color to grow their businesses, and that these two new credits “would help close these gaps.”
“Women business owners, particularly women of color, are underestimated, underrepresented and undercapitalized,” the senators said.
Wyden said the Democratic Congress and Biden administration have begun to change the tax code to help close the income and wealth gap, pointing to last month’s coronavirus relief law that expanded both the earned income tax credit and child tax credit. The EITC for childless workers was tripled, while the child tax credit increased from $2,000 to $3,000 and to $3,600 for children under age 6, regardless of income.
Republicans defended the 2017 law, crediting it with creating a pre-pandemic economy they say was on the right path. That economy posted near-record lows in the unemployment rate and record lows in unemployment among minorities.
“Prior to the pandemic the United States was experiencing one of the strongest economies across demographics in decades,” said Finance ranking member Michael D. Crapo, R-Idaho.
The 2017 law made the tax code more progressive in a number of ways, including doubling the child tax credit to $2,000, Crapo said.
“Going the opposite direction of combating inequality in the tax code are efforts like trying to roll back the [SALT] cap,” Crapo said, launching what became a Republican refrain throughout the hearing.