Repealing The Cap On State And Local Tax Deductions Would Widen The Racial Wealth Gap, New Study Shows

This post was originally published on this site

Topline

As some lawmakers from high-tax Blue states push for the elimination of the Trump-era $10,000 cap on state and local tax (SALT) deductions, a new study from the left-leaning Institute on Taxation and Economic Policy shows that repealing the deduction would not only disproportionately benefit the wealthy, but also white taxpayers, widening the already yawning racial wealth gap.

Key Facts

“The vast majority of families would receive no benefit from SALT cap repeal, and ITEP’s new analysis shows that people of color are especially unlikely to benefit,” the researchers wrote. 

Their analysis shows that Black families would be 42% less likely to benefit from the repeal (5.6% of Black households would pay less taxes, compared to 9.7% of white families). 

Two-thirds of the tax benefits of repealing the cap would go to white families earning more than $200,000 per year, the study shows, while 5.1% of the benefit would go to Black households at the same income threshold. 

One reason for this disparity, the researchers said, is the way the SALT deduction favors taxpayers with higher incomes and those who own valuable homes.

Since white families tend to earn more and are also more likely to own property, they are more likely to benefit from the cap’s repeal. 

Big Number

$67 billion. That’s the total tax benefit white families earning more than $200,000 would receive in 2022 if the SALT cap were eliminated (based on a rough annual cost estimate in 2022 of $100 billion), according to ITEP. Black families at that income threshold would see a tax cut of $5 billion, and Black families below the $200,000 threshold would see a cut of just $600 million.

Crucial Quote

Defenders of the SALT deduction argue it allows states and localities to impose more taxes on their wealthier residents. “Repealing the SALT cap would likely crowd out other, much more progressive policies and programs from the upcoming infrastructure package while doing comparatively little to encourage progressive revenue raising at the state and local levels,” study authors Carl Davis and Jessica Schieder wrote in a Tuesday blog post. “Lawmakers eager to be rid of the SALT cap should look toward broader itemized deduction reforms,” they added.

Key Background

The cap on state and local deductions was a major element of former President Trump’s 2017 Tax Cuts and Jobs Act. Under that law, the $10,000 cap will expire in 2025. Some lawmakers in Washington are fighting to ensure President Biden’s $2+ trillion infrastructure spending plan contains an immediate repeal of the SALT cap—and threatening to vote against the legislation if it does not. Last week, a bipartisan group of 32 members of the House announced they had created a SALT Caucus dedicated to reinstating the deduction. “The cap on the SALT deduction has been a body blow to New York and middle-class families throughout the country. At the end of the day, we must fix this injustice,” Rep. Tom Suozzi (D-N.Y.) said in a statement. ITEP’s researchers found that Black families in California, Illinois, New Jersey and New York—four states with delegations that account for 90% of the new caucus—are between 44% and 54% less likely to see a tax cut from the repeal than white families. Hispanic families are between 49% and 60% less likely to see a tax cut, the researchers said. 

Tangent 

When New York Governor Andrew Cuomo announced a budget deal (now signed into law) earlier this month that included major tax hikes for his state’s wealthiest residents, he claimed that net taxes for New Yorkers would actually go down because he was counting on a Democratic Congress to repeal the SALT cap. 

Further Reading

Not Worth Its SALT: Tax Cut Proposal Overwhelmingly Benefits Wealthy, White Households (Institute on Taxation and Economic Policy)

17 New York Democrats Threaten To Oppose Tax Bill Without SALT Restoration (Forbes)

The New Civil War: Blue States Soak The Rich; Red States Sue To Cut Taxes (Forbes)