Tax deductions

Towards a consensus on Build Back Better

As part of the Build Back Better Reconciliation bill currently under consideration, one of the provisions of the Tax Cut and Jobs Act of 2017 has a good chance of being amended. That is, the State and Local Tax Deduction (SALT) cap will most likely drop from $ 10,000 to something like $ 72,500. A critical mass of Democrats have drawn a line in the sand, making this change a prerequisite for their support for the bill.

The most vocal supporters of raising this ceiling are MPs from high-tax states, where the ceiling affects the largest number of taxpayers. Raising this ceiling directly benefits these voters. The higher the cap, the greater the tax savings, as the amount of savings increases as income levels rise. As such, raising the cap is at odds with the direction of Democrats who generally support making our tax system more progressive – especially at the higher end of the income spectrum. This legislation is contrary to this broader general intention.

My reflection on this question begins with whether a deduction for SALT is warranted. In a perfect world, the funding needs of the federal government versus those of state and local governments are distinct; and taxpayers should be required to cover the costs associated with their respective locations, wherever they live. In addition, it is reasonable to expect higher tax states and towns to provide a greater range or depth of public services. It’s not like taxpayers don’t get what they pay for; but at the same time, those who bear the highest tax obligations in high-tax states may think their tax burden is too great for the value of the services they might receive. Failure to mitigate these costs for these taxpayers would certainly encourage some to vote with their feet and move to lower cost areas. The real unintended consequence of the SALT deduction cap would be the drop in tax collections realized by cities and states that lose these rich taxpayers.

It’s understandable that advocates for high-tax states want the SALT deduction allowance to be unlimited, or otherwise, increased as high as possible. Advocates of low-tax states, on the other hand, would reasonably wish these deductions to be eliminated altogether, as these deductions effectively shift the share of federal funding from high-tax states to low-tax states. Either way, it appears to be a beggar your neighbor setup.

I see the threat of migration as real, but I’m ready to live with it. Ultimately, in response to declining tax revenues, tax authorities would be forced to either change their collection practices, where those who remain after the flight of the rich will necessarily be forced to accept a greater share of the tax burden. , and / or the services will have to be cut. Either or both will happen, or the federal government will have to step in to fill at least part of the void.

Those in favor of maintaining SALT deductibility view SALTs as different from other household expenses in that they are largely non-discretionary. While this characterization may be true for income taxes and even property taxes to a large extent, it may not apply to sales taxes. Either way, however, those who share this view generally argue that federal taxes are better leveled on discretionary income, as opposed to a broader measure of income. Excluding SALT comes close to this ideal.

Critics of the cap also argue that if a cap is to be put in place, $ 10,000 is just too low because it is binding on far too many working families. It doesn’t just hit the rich. While this may be true for this isolated feature, the $ 10,000 cap was part of a larger package that included increased standard deductions and a general reduction in marginal tax rates, resulting in savings. tax to virtually all income. levels.

It appears that the $ 72,500 cap on SALT deductions being discussed is the trade-off needed to move the broader legislation forward towards consensus. In my opinion, this should not be necessary, as it undermines the increased progressivity of our tax system that would otherwise occur. Still, if this compromise is what it takes to adopt Build Back Better, I can live with it even if it smacks of pork barrel politics. Sometimes it is enough to plug your nose and kiss the suboptimal. In the case of Build Back Better, the good far outweighs the bad.

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