The fight for SALT is heating up. Whats Next?

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In 2017, when a Republican-led Congress made more restrictive fiscal policy, New York Gov. Andrew Cuomo, a Democrat, called it “an economic dagger aimed at the heart of New York.” Several months later, New York and three other states unsuccessfully sued the federal government over the change. At issue was the state and local tax deduction on federal returns, which was capped at $ 10,000 as part of the Tax Cuts and Jobs Act. Taxpayers in higher-cost areas like New York, California and Illinois had long relied on the ability to deduct such taxes, and the majority Democratic states where they live had budgeted based on that deduction as well.

The cap was “clear and politically motivated punishment from the blue states,” said New Jersey Governor Phil Murphy, also a Democrat at the time, “who already pays far more to the federal government than we receive.” Now the deduction, known familiarly as “SALT”, is back in the spotlight. Several representatives of the blue state have recently announced that they will retain support for President Joe Biden‘s infrastructure spending bill, legislation they would normally favor, unless the $ 10,000 cap is repealed, even as policy analysts acknowledge each time. more than the time of deduction could have passed. If all politics is local, and the proceedings in Washington take place at one of the most contentious times in American history, then changes in the tax code that pit geographic areas against each other in a way that can seem like the sum zero is perhaps a natural consequence. “I’m amazed that it keeps showing up,” said Tracy Gordon, acting director of the Urban-Brookings Center for Fiscal Policy. “There seems to be a broad consensus in Washington that repealing it would be a bad idea, and yet people in affected areas feel it viscerally.” A “bad idea,” analysts say, not only because it would lead to a loss of revenue of about $ 100 billion this year, according to the Institute for Fiscal and Economic Policy, but because of the perspective of the situation. “We live in very polarized times, with high income inequality,” Gordon said in an interview. “The fact that this predominantly affects people at the top and in very blue states gets the attention of people on both sides. Some people feel attacked by (the 2017 tax changes) and some would say those people are just complaining. “It is also inevitable that the same states that claim the cap has caused hardship are those that appear to have performed well over the years. the COVID crisis: your higher proportion of white-collar workers have been able to work remotely, a higher proportion of people with a higher interest in the stock market DJIA, fortunes + 0.70% have been lucky, and so on Gordon noted. There’s also not much evidence that a substantial number of higher-income people have left the higher-tax states as a result of the cap, at least so far. Read next: State of the States: Are They Here Again? rainy days? In four graphs, the pain of the pandemic Despite that, it is also the case that people with higher incomes in higher cost areas can have more of their wealth wrapped up in their homes and may feel more “middle class” than rich, said Garrett Watson, senior policy analyst at the Tax Foundation. The Tax Foundation calls itself “independent,” but media reports often describe it as center-right, while the Tax Policy Center, Gordon’s organization, is often labeled left-wing. However, when it comes to SALT issues, there is a great deal of consensus. For his part, Watson is looking not only at specific maneuvers around SALT, but also at the wider landscape in which it lives. Among the additional tax law changes being discussed, such as capital gains tax increases, as well as more generous support from the federal government, SALT could best be discussed as part of a holistic package, Watson told MarketWatch. There are several compromise measures floating around, including doubling the limit to $ 20,000 for married couples or imposing income limits on the deduction, Watson said. “Are the people who support the removal of the cap comfortable with that kind of commitment?” The cap will become permanent in 2025, he noted, so some of the moves that are taking place now may have that date in mind. And while SALT can always be a lightning rod, Watson and other tax watchers think the time might be right for some big changes. “There is a lot of discussion, but hidden within it is an opportunity to talk about reform,” he said. “There are many opportunities for simplicity.” Traditionally, fiscal policy has been viewed in the context of its impact on taxpayers, not regions of the country, Gordon reflected. “The federal tax system is not indexed for places with a higher cost of living,” he said. “SALT and the mortgage interest deduction helped incentivize people to live there. They were a back door grant to help people live there. But high-cost cities like San Francisco or New York City are also places where people are very productive. It is good for the economy that people are concentrated there ”. See: What’s the use of a traveler‘s tax in a work-from-home world?