Opinion: Biden may have to compromise on the SALT cap for his fiscal plan to pass Congress

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President Biden announced the American Family Plan this week, and the proposal includes an increase in capital gains tax to 39.6% for people with incomes over $ 1 million. However, he is likely to pass it in Congress, depending on whether he accepts any adjustments to the limitation of the state and local tax deduction, or SALT. While Biden’s proposal currently keeps the $ 10,000 cap on SALT deductions in place, you may have to accept an increase, if not a total repeal, to get key Democratic votes.

If he accepts the repeal of the SALT limitation, Biden is no longer consistent with his theme that this legislation is raising taxes on the rich to redistribute wealth to low-income Americans. It may mean that some of those million dollar winners will pay less, not more, in taxes. For those making $ 1 million now, their long-term capital gain from the sale of assets like stocks and bonds held for more than a year is taxed at 20%. Biden’s proposal would change that rate to 39.6%. And in the case of SALT, no more than $ 10,000 is deducted if it is not attributable to a trade or business. The repeal of the SALT limitation, enacted as part of President Trump‘s tax cuts in 2017, is critical for members of Congress in high-tax states like New York and California. EXAMPLE: A person has a salary of $ 1 million, a capital gain of $ 100,000, and a total of $ 200,000 of state, local, and non-business real estate taxes. Currently, the gain of $ 100,000 results in a tax of $ 20,000 and the tax deduction is limited to $ 10,000. If the capital gains tax is raised to 39.6%, the individual will pay an additional 19.6% ($ 19,600) tax on the capital gain. But if the SALT limitation is repealed, your taxes decrease by $ 75,240 ((200,000 – 10,000) x. 0.396) This extremely simple example omits several rules that could change the previous result, such as the Alternative Minimum Tax (AMT) and 3.8% . tax on net investment income above a certain threshold. However, the fundamental problem remains that some wealthy people will see their federal income tax decrease despite an increase in capital gains tax if they can deduct all of their SALT. And any reform package must address SALT if it is to receive the full support of legislators in high-tax states. How, then, is Biden going to achieve a capital gains tax increase through Congress without repealing the SALT limit and compromising his issue of raising taxes on the rich? You could accept the SALT waiver and seek a return to an overall reduction in itemized deductions for high-income individuals similar to the “Pease” rule prior to 2018, where such deductions were reduced by 2% of adjusted gross income above of a threshold. Alternatively, and in my opinion most likely, the $ 10,000 limitation could be increased to $ 20,000 or whatever amount is needed to gain support for the high-tax state representatives general plan. Finally, you could accept the SALT deduction for regular tax purposes knowing that the taxes are not deductible for AMT. However, although the tax base on which the AMT is applied is higher than the regular taxable income, it would be necessary to increase the highest rate for the AMT (28%). Otherwise, the tax savings from the 39.6% regular tax deduction would still have a net tax reduction that exceeds the additional AMT tax without the deduction. Given the insistence of members of Biden’s own party for the repeal of the SALT limit, it is likely that the administration will find some compromise to obtain sufficient support for the approval of the entire proposal. In any event, the resolution of the SALT limitation will be critical to the proposal to increase taxes on capital gains and determine whether another major tax reform will be enacted in 2021. Donald Williamson is a professor in the department of accounting and taxation at American University. Kogod School of Business and is the Executive Director of the Kogod Tax Policy Center.