This week, the attorneys general of four high-tax Northeastern states, New York, New Jersey, Connecticut, and Maryland, brought a lawsuit against the Treasury Department alleging that a tax provision of the Tax Cuts and Jobs Act of 2017 is unconstitutional. The issue in question is a new $10,000 limit on a taxpayer’s ability to deduct state and local taxes.
Others, such as Joe Henchman at the Tax Foundation, have deconstructed the frivolous nature of this case from a legal perspective. It goes without saying that no state has a “right” for its residents to be able to deduct their state and local taxes on their federal income tax returns. It follows that Congress can provide any such deduction as it pleases, from no deduction whatsoever all the way up to a full deduction for everyone, or any deduction rules in between. The $10,000 limit on the state and local taxes, or SALT, deduction is entirely constitutional and well within Congress’ power to set income tax rules.
What is more interesting about this uphill fight that four blue-state politicos have picked is how it reveals the extent to which the modern Democratic party has come to be dominated by rich, coastal elites. Any reasonable analysis, including by left-of-center tax experts, conclusively demonstrates that uncapping the SALT limit would be a massive tax cut for the rich.
According to the liberal Tax Policy Center, 96 percent of the increased tax revenue the federal government will collect by limiting the SALT deduction to $10,000 will be borne by taxpayers in the top one-fifth of income earners (those earning $150,000 or more). The bottom 80 percent of taxpayers (those earning less than $150,000) will be almost entirely unaffected by it.
It’s even more top-heavy than that. The same Tax Policy Center reports that a majority of the SALT limit will be borne by taxpayers in the top 1 percent of income earners, those making more than $730,000 per year. That’s right: More than half the money from limiting SALT is coming from the same “1 percent” group that Occupy Wall Street organized against. The same liberals who wanted to redistribute income from the top of the income spectrum a decade ago now want to give millionaires a big tax cut.
That’s consistent with the Democrats’ opposition to the tax reform law more generally. Not a single Democrat voted for President Trump’s signature tax reform law, despite the fact that Congress’ nonpartisan Joint Committee on Taxation reported that the law actually makes the tax code more progressive than it was before. Taxpayers making more than $1 million per year, the same “top 1 percent” crowd we’re talking about, saw their share of the federal tax burden rise with passage of the new tax law, from 19.3 percent to 19.8 percent of all federal taxes paid in 2019.
A big part of this increase was the limit on SALT deductibility. The SALT provision is impactful enough that it cancels out other tax cuts in the Tax Cuts and Jobs Act that directly help these millionaire taxpayers, such as cutting the top income tax rate from 39.6 percent to 37 percent and increasing the “death tax” standard deduction from $5.5 million to $11 million — not to mention the benefits millionaires indirectly derived from cutting the corporate income tax rate from 35 percent to 21 percent.
What’s going on here? Why are the most liberal Democrats in the country from the bluest states in the country bringing a frivolous lawsuit on behalf of millionaire taxpayers? Shouldn’t Democrats be happy that millionaires are paying a greater share of federal taxes than they were before?
The answer is twofold. First, state and local governments used to be able to hide the true size of their tax burdens thanks to the uncapped SALT deduction (but not as much as they thought due to backdoor SALT limits like the AMT and the Pease itemized deduction phaseout). If a top-bracket taxpayer had a $100,000 SALT bill and could deduct it against his 39.6 percent federal tax rate, that lowered his federal income taxes by $39,600.
The second reason is that the Democrats have become the party of the very poor and the very rich. According to CNN exit polls from the 2016 election, Hillary Clinton trounced Trump 53-40 percent among voters making less than $30,000. All the way on the other end of the spectrum, Clinton beat or tied Trump with voters making $200,000 or more.
The broad middle class was a different story. Trump won those making $50,000 to $200,000 per year. The GOP is now the party of the working class all the way up through the mass affluent. These voters saw big tax cuts in the Tax Cuts and Jobs Act, notably through a doubling of the standard deduction and child tax credit and a lowering of tax rates (the lowest three rates declined from 10, 15, and 25 percent to 10, 12, and 22 percent, respectively). According to JCT, taxpayers making $50,000 to $200,000 per year saw their aggregate federal tax bill cut by $117 billion in 2019 alone. Most of these families won’t care about SALT limits because they won’t itemize deductions — JCT says about nine in 10 taxpayers will elect the standard deduction, up from seven in 10 before the tax reform law.
A minirealignment has happened in politics, and it occurs along income lines. The Democrats’ coalition looks like a barbell, with very rich and very poor in an uneasy truce. The Republicans’ coalition looks more like a diamond, with very few members on either extreme end of the income scale and most of their voters in the middle. The parties’ varied responses to the Tax Cuts and Jobs Act, both silly and serious, are informed by this new electoral reality.
Ryan Ellis (@RyanLEllis) is a senior policy adviser for the Family Business Coalition.
