As his committee began drafting the 2017 Tax Cuts and Jobs Act, Senate Finance Committee Chairman Orrin Hatch had three central goals: to make the tax code fairer, simpler, and less burdensome at every level of income. The final bill wasn’t perfect — every member of Congress had priorities left on the cutting-room floor — but it did accomplish all three of these goals to varying degrees.
One of the strongest provisions of the act in terms of fairness was the $10,000 cap it placed on the federal deduction that taxpayers can take for the state and local taxes they pay. Given Democratic rhetoric over the years and the fact that SALT overwhelmingly benefited the very wealthy, not the middle class, it seemed like it should be a less controversial provision than others.
Most people who care about SALT are the wealthy in high-tax states, their well-compensated tax advisers, and a few economic policy wonks. For states such as Ohio, where the governor and legislators have sought to reduce the state tax burden, the SALT deduction is an afterthought.
This is why it was so disappointing to see that House Speaker Nancy Pelosi decided in her new stimulus bill to undo SALT “retroactively,” as she earlier put it, thereby reversing the limits we placed on a deduction for the rich. For someone who bemoans tax breaks for the rich, Pelosi’s statements reveal her hypocrisy in a blinding fashion.
According to the Tax Foundation in 2016, prior to passage of the Tax Cuts and Jobs Act, nearly 80% of the benefit from the SALT deduction accrued to those making over $100,000, with just over 6% accruing to those making less than $50,000. In 2017, one of the ways we made the tax code fairer was to cap the itemized deduction for state and local taxes paid at $10,000. This allows middle-class taxpayers to continue to benefit from SALT without double-cutting the taxes of the rich.
Pelosi’s new bill retroactively removes the $10,000 cap allegedly to help stimulate an economy damaged by the COVID-19 pandemic. Removing the SALT cap will fail to accomplish this goal for a number of reasons, but most obviously because doing so puts more dollars into the hands of people who are already rich.
What middle-class people need is true tax relief, such as a payroll tax cut, deeper relief for small businesses, or simply making the across-the-board tax cuts from the Tax Cuts and Jobs Act permanent.
The deeper problem with lifting the SALT cap is that this would reverse the most significant step that tax reform took toward a fairer individual tax code. If the cap is lifted temporarily, there will be pressure to remove it permanently, which would cost the federal government hundreds of billions in tax revenue.
If Pelosi wants to stimulate the economy, she should give workers relief through a payroll tax reduction. Provide relief for the businesses that create jobs, provide respite for investors that fund the innovations we need during this pandemic and after, but do not rerig our tax code in favor of rich people on the coasts at the literal expense of the heartland.
Shay Hawkins is the president of the Opportunity Funds Association and was the lead policy adviser to Sen. Tim Scott, a Senate Finance Committee member, during the drafting of the Tax Cuts and Jobs Act.
