Tax Foundation: Bill to restore full SALT deduction would benefit high earners

A bill from blue-state lawmakers to restore the full state and local tax (SALT) deduction and raise the top individual tax rate would cost $532 billion over a decade and primarily benefit those with high incomes, according to a report released Monday by the right-leaning Tax Foundation.

“Overall, this swap would reduce revenue collected by the federal government,” Tax Foundation analysts wrote in their report.

{mosads}Sen. Bob Menendez and Rep. Bill Pascrell, both New Jersey Democrats, introduced legislation last month that would repeal the $10,000 limit on the SALT deduction created by Republicans’ 2017 tax-cut law. The bill would also raise the top individual tax rate from 37 percent to its pre-tax law level of 39.6 percent.

The legislation is co-sponsored by many other lawmakers from high-tax states, including GOP Rep. Chris Smith (N.J.) and three Democratic presidential candidates: Sens. Cory Booker (D-N.J.), Kirsten Gillibrand (D-N.Y.) and Kamala Harris (D-Calif.).

Lawmakers from high-tax, Democratic-leaning states object to the SALT deduction cap because they argue that it unfairly punishes their states, which give more money to the federal government than they get back from it. The lawmakers have also said that some of their constituents are seeing smaller refunds and higher taxes due to the SALT deduction cap.

President Trump has suggested that he’s open to revisiting the SALT deduction cap, but key GOP lawmakers have said they won’t reconsider it. Many Republicans argue that the SALT deduction subsidizes higher state taxes and that blue-state governors should lower their states’ taxes. They also note that the majority of taxpayers in high-tax states are still getting a tax cut under the 2017 law, due to changes such as lower rates and a higher exemption level for the alternative minimum tax.

The Tax Foundation estimated that raising the top individual rate to 39.6 percent would not raise nearly enough revenue to cover the cost of repealing the SALT deduction cap. The group estimated that raising the top rate would raise about $111 billion over ten years, while eliminating the SALT deduction cap would lower revenues by about $643 billion.

The Tax Foundation also estimated that the bill from Menendez and Pascrell would almost exclusively benefit those at the top end of the income spectrum. That’s because people can only take the SALT deduction if they itemize their deductions, and higher earners are the most likely to itemize. The group also said that raising the top individual rate to 39.6 percent would not offset all of the benefit that high earners would receive from eliminating the SALT deduction cap.

According to the Tax Foundation’s estimate, taxpayers in the bottom two-fifths of income would get no tax cut under the bill, and taxpayers in the next two-fifths of income would see a “negligible” impact. Taxpayers in the top 1 percent of income would see the biggest benefit from the bill, receiving an increase in their after-tax income of 1.77 percent in 2019 and 2.79 percent in 2025.

“Eliminating the SALT cap and increasing the top rate to 39.6 percent would make the tax code less progressive,” the Tax Foundation wrote.

Pascrell and Menendez’s offices on Monday defended the lawmakers’ bill, and noted that the Tax Foundation has been a supporter of the GOP tax law and has argued in favor of eliminating the SALT deduction. 

“While we wait for official scores from the non-partisan Joint Committee on Taxation before drawing any conclusions on cost, no distribution table can give the full story of the damage the SALT cap is inflicting homeowners and communities,” spokesmen for Pascrell and Menendez said in a statement.

Updated at 4:53 p.m.