As negotiations continue on Joe Biden’s massive “Build Back Better” budget reconciliation bill, Democrats are jockeying for a half-trillion-dollar tax cut for their wealthy constituents as a trade-off for some of the progressive spending spree programs that have been set aside.
The cut will come by reinstating the federal tax deduction for State and Local Taxes (SALT). The amount of federal revenue that will be slashed is more than two and a half times the amount of federal earned income tax credit and child tax credit combined.
Reinstating SALT deductions would allow taxpayers to deduct the amount paid to state and local governments for income, property, and sales taxes from their federal return. The Trump tax cut passed in 2017 placed a cap on SALT deductions of $10,000. The current Democrat proposal would make the SALT deduction uncapped for five years.
Removing the SALT cap would be the most expensive change by far to the spending bill, currently carrying a price tag of around $1.75 trillion, outpacing the $400 billion proposed for universal child care and preschool. Medicare expansion is currently expected to cost only $165 billion in comparison.
While it remains unknown if the Congressional Progressive Caucus goes along with the cuts already made from the spending bill’s original $3.5 trillion level, Democrats from high-tax “blue” states like Rep. Josh Gottheimer (D-NJ) are saying they will not support the bill unless the SALT uncapping is included.
Blue states with large populations of wealthy taxpayers like New Jersey, New York, and California have been pressuring their representatives to reinstate SALT ever since the 2020 election. The SALT cap is considered a punishment by the wealthy residents of those states. They warn that the cap affects the ability of their home states and cities to raise revenue without driving residents away to lower-tax states.
About 80 percent of the lost federal revenue from reinstating the SALT deduction would go to the highest-earning 5 percent of households nationwide. According to the Committee for a Responsible Budget, the reinstatement would give earners a tax break to earn over $1 million per year averaging $60,000 annually.