Ever since Congress capped the state and local tax (SALT) deduction in 2017, a small group of Blue State Democrats has demanded the cap’s repeal. Indeed, they have made it their price for supporting President Biden’s Build Back Better social spending bill.
Now, it appears they may get their wish. The result, though, may be policy that is both bad and poorly designed. Not only may Congress repeal the cap but it may do so in a way that hides its true costs. And indeed, do it in a way that makes a tax windfall for a relatively small number of high-income people look like a revenue raiser.
Such legerdemain would be clever, if it were not such an old trick. As it is, it is merely irresponsible.
The on-and-off cap
The plan reportedly would repeal the SALT cap for 2022 and 2023 only. The $10,000 cap would, in theory, resume in 2024 and 2025. Under the 2017 Tax Cuts and Jobs Act (TCJA), the cap expires at the end of 2025. But the plan would then restore it for 2026 and 2027.
Why all this toggling on and off? Simple, the idea is to use congressional scoring conventions to make a tax cut look like a tax increase.
Here’s how: Repealing the SALT cap would reduce federal revenue by about $90 billion-a-year, or $180 billion for two years. But Congress only cares about the Joint Committee on Taxation’s (JCT) 10-year revenue estimates. And, because the cap theoretically expires after 2025, sponsors of the temporary repeal can claim it raises revenue by restoring the cap after that date. Because the cost of the SALT deduction grows every year, capping it again in 2026 and 2027 more than offsets the cost of repeal for 2022 and 2023.
It is hard to image that any lawmakers who support repealing the cap actually intend for Congress to restore the limit in 2024 or revive it again in 2026. But JCT is not allowed to assume future political reality. It can only work from the letter of a bill, even if it improbably treats the cap like a policy yo-yo.
Gaming the system
And politicians have learned to manipulate those rules.
Paying for a tax cut today with the promise of tax increases or spending cuts down the road is a hoary old game in Congress. You may remember the so-called “doc fix.” In 1997, Congress voted to reduce Medicare costs by slowing the growth in payments to physicians. Then, every year for the next 17 years, it put off the payment limits (thus, the doc fix). In 2015, lawmakers finally acknowledged reality and repealed the ’97 law.
But it didn’t matter that the proposed payment curbs never raised any money, or never even happened. Congressional scorekeepers gave lawmakers the number they needed in 1997.
Similarly, dozens of special interest tax extenders litter the revenue code. Congress extends them a year or two at time so it can mask their 10-year cost.
Of course, repealing the SALT cap isn’t just dishonest budgeting. It also is terrible policy.
Half the benefit to the top 1 percent
The Tax Policy Center estimates that more than half the benefit of repeal would go to the top 1 percent of households, those making $824,000 or more. On average, they’d get a tax cut of about $35,000 in 2022. The top 0.1 percent, who make at least $1.6 million, would get an average tax cut of about $154,000.
In 2022, only 4 percent of middle-income households would get a tax cut if Congress repeals the SALT cap. And it would be worth an average of about $20.
Supporters of an unfettered deduction argue that it could provide resources for states to fund social programs. But there are more efficient ways to do that.
Repealing the SALT cap, even temporarily, also carries an enormous opportunity cost. At a time when Democrats are slashing the size of President Biden’s Build Back Better social spending bill to satisfy moderates, the SALT cap repeal is sucking up billions of dollars that could be used elsewhere.
Better ways
The Committee for a Responsible Federal Budget calculates that for the same $90 billion annual cost, Congress could expand Medicaid coverage for both health care and long-term care, pay for community college, family leave, and fund several other priorities.
I get that Blue State Democrats representing high-income districts need to deliver on their promise of fixing the SALT cap. But there are plenty of other ways for them to do it that are neither regressive nor reliant on shameless budget gimmicks. My TPC colleague Frank Sammartino suggested five ways that are budget neutral and progressive. TPC colleagues Len Burman, Tracy Gordon, and Nikki Airi proposed this idea. Richard Reeves and Christopher Pulliam at Brookings described another method here.
There still is time for Congress to find another way to fix the SALT cap.
