The House and Senate’s dueling proposals to expand the state and local tax deduction would both deliver large tax cuts to the wealthy, while failing to do much for middle-income households, according to new analysis from the Urban-Brooking Tax Policy Center.
The left-leaning think tank compared the two plans to expand the politically important, but controversial, tax break aimed at helping people in high-tax states like New York, New Jersey and California.
The House proposes increasing the cap on the SALT deduction to $80,000 from $10,000 as part of President Joe Biden’s Build Better bill. Senators Bernie Sanders and Bob Menendez are leading talks to cap the tax break by income, making it unlimited for those earning about $400,000 and phasing it down above that amount, citing concerns that the House plan would do too much to benefit the wealthy.
“The plan Sanders, Menendez and other Senate Democrats are developing would be only a modest improvement over the House’s $80,000 SALT cap,” the Tax Policy Center’s Howard Gleckman and Len Burman wrote in a blog post Thursday. “The House plan would produce a huge windfall for the very rich. The Senate would limit its windfall to the merely rich. And neither would do much at all for middle-income households.”
About 94% of the SALT benefits in the House’s $80,000 cap proposal would go to the top 20% of earners—or those earning about $175,000 or more. In the Senate plan for unlimited SALT benefits under $400,000 in earnings, about 88% would go the top fifth of U.S. households, according to the Tax Policy Center data.
Sprinkling SALT Benefits
Because Democrats are leaving many of former President Donald Trump’s tax cuts intact, a more generous SALT deduction could mean that many high-earners could end up paying less in income taxes under Biden than they did during the Trump era.
The very richest Americans would be the most affected if Congress were to go with the Senate plan over the House plan, according to the data. In the House’s version, one-third of the benefit from deducting SALT from federal income taxes goes to the top 1% of earners. In the Senate plan, only 0.1% of the benefit would go to one-percenters.
Middle-income households would get an average 2021 tax cut of about $20 from either proposal, the analysis found. That’s largely because people toward the upper end of the income spectrum tend to claim the write-off. Only about 10% of households have enough deductions—from SALT, mortgage interest, charitable deductions and other write-offs—to itemize their tax returns, versus taking the simpler standard deduction which is $25,100 for a couple this year.
The debate over how to address the SALT deduction has put Democrats, who have for years talked about lessening income inequality and making the tax code more progressive, in an awkward position politically. Some Democrats representing high-tax states, like Representatives Tom Suozzi of New York and Josh Gottheimer of New Jersey, say a more generous SALT deduction is a pre-requisite for them to support the bill.
The SALT cap rollback wasn’t included in Biden’s original proposal. White House press secretary Jen Psaki said Thursday that House and Senate leaders have told the president “that this needs to be included in order for this legislation to move forward. And he certainly understands that and takes these legislators who’ve been doing this a long time very effectively at their word.”