The Economist December 4th 2021 41
United StatesState-and-local-tax deduction
A tax plan for the upper, upper class
T
ry to stuffa party’s entire agenda into
one giant piece of legislation, and a bat-
tle royal will ensue. Such is the case with
the Democrats’ aim to cram policy on pov-
erty relief, child care, climate change,
health care, higher education, pre-school,
tax reform and more into the Build Back
Better (bbb) Act, which passed the House
of Representatives on November 19th.
As its price tag has been slashed to
$1.7trn over a decade, half as much as first
pitched, the hunger—or squid—games be-
tween progressives and moderates have
turned fiercer. (Against united Republican
opposition and with no votes to spare in
the Senate, any Democratic defection
would scupper the bill.) This has mostly
been to the benefit of the moderates, as
senators like Joe Manchin and Kyrsten Si-
nema have wielded their veto threats to
weaken or kill some mooted carbon-emis-
sions limits, a paid-family-leave pro-
gramme and tax rises for rich Americans
and firms. But a lesser-known faction, the
saltCaucus, may have made out best of all.
The salt Caucus is named after the
“state and local tax” deduction. The ex-
emption, which dates back more than a
century, allows taxpayers to deduct prop-
erty and state-income taxes when filing to
the federal government. For much of its
history, this exemption was limitless. That
helped the well-to-do who faced big bills
for their houses and incomes—and the
high-income, high-tax states that received
an implicit subsidy from the federal gov-ernment. The subsidy cost $369bn (1.9% of
gdp) in 2017. It became less generous that
year after Republicans passed legislation,
signed by President Donald Trump, cap-
ping the deduction at $10,000 a year.
For most Americans, this had little im-
pact. According to the Internal Revenue
Service, 87% of tax returns do not bother to
itemise all their exemptions, which would
amount to less than the standard deduc-
tion ($12,000 for a single filer in 2018). But
legislators in high-tax states such as New
York and California saw the reform not as a
laudable effort to tax the rich (which it did
rather well), but a punitive blow.
The saltCaucus was soon formed as a
resistance movement. “This was explicitly
designed to go after states that tax people
to support better schools and services,”
says Tom Malinowski, a Democratic con-
gressman from New Jersey and a saltCau-
cus member, who notes that in some
towns in his district the average home-
owner may owe $20,000 in property tax.
Days before the bbbAct’s passage in the
House, the caucus secured an increase in
the limit on deductible expenses from
$10,000 to $80,000 for the next ten years.
This constitutes one of the biggest ex-
penditures in the pending budget bill. And
it is steeply regressive (see chart). It is di-
viding Democrats, who may yet push for
significant changes in the Senate.
Over the next five years, the new salt
provision would cost the federal govern-
ment an additional $275bn relative to cur-
rent law. That is much more than bbbplansWASHINGTON, DC
Why Democrats may spend hundreds of billions subsidising the rich
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46 Lexington: Son of a slaveA lump of SALT
United States, share of benefit of raising the
SALT* deduction cap, Nov 2021, by income group, %Source: Tax PolicyCentre *StateandlocaltaxNil 0.1100806040200
Lowest Second Middle Fourth To p80-99Top 1%Top 0.1%Income quintile