Out on the 2020 campaign trail, all you see is the presidential candidates pushing for free stuff and pounding the podium about marginalized groups. Talking incessantly about income inequality and elevating the minimum wage is a typical schtick. So is raising taxes on the wealthy. If you come from a state where housing is completely unaffordable, like Kamala Harris, you are even proposing federal tax dollars subsidize rent in your state.
Of course this means raising taxes only on the very wealthy. Those with billions lying around who have yachts and stuff. Democrats are all about the middle class, the working class and the poor, right? Not so much.
It started with the tax reform bill passed by Congress and signed by the President. As written the legislation increased the standard deduction for many taxpayers, reduced the number of brackets and brought the top bracket down to 37%. Most Americans saw an increase to their weekly paychecks beginning in January of 2018 as a result of the law and over 60% had a lower tax bill at the end of the year.
The legislation also limited what is known as SALT deductions, or the amount you can reduce you federally taxable income as the result of paying state and local taxes. Prior to the tax reform bill, there was no limit. This allowed some states, especially those that are deep blue in hue, to have significantly higher tax rates without upsetting their residents. If a taxpayer itemized deductions, their state and property taxes were deducted from their income before their federal tax was calculated.
The tax reform bill limited the SALT deduction to $10,000. Combined with the increase in the standard deduction, residents in many low tax states in many states, like Florida, Tennessee and Texas no longer needed to itemize to realize savings. However, wealthier residents in deep blue states, unable to fully deduct their high state and local taxes, were headed for a tax increase. Blue state governor’s scrambled to fix the problem by proposing additional corporate taxes and taxes on consumer goods.
Governor Andrew Cuomo was so apoplectic, he actually went to meet with Donald Trump to ask the SALT cap be reversed. The state ended up having a shortfall of $3.9 billion in tax receipts largely as the result of wealthy people fleeing the state to lower tax havens like Florida. In New York, the top 1% of earners pay 46% of the taxes according to state officials. If they make their second home in Florida their primary residence, it doesn’t take much to seriously hamper the state budget.
Never fear, Democrats want to fix this problem for the 1%. Democrats in both the House and Senate proposed the SALT Act back in February. The bills are currently in committee and seek to eliminate the SALT cap and restore the top tax rate of over 39%. While this legislation has a snowball’s chance with a Republican Senate and Trump in the White House, it is a clear indication of where the Democrats intend to go should they win a trifecta in government in 2020.
This bill does nothing but protect the tax liability of the wealthiest residents in the highest tax states. It actually punishes wage earners in lower tax states by forcing them to pay a larger share of their income to the federal government that their blue state peers. If someone in Florida makes $100,000 a year, they have very little in terms of state and local taxes to deduct from their income before their marginal tax rate is applied. Someone in New York making the same amount has far more to deduct and will pay less in federal taxes, and possibly even a lower marginal tax rate than the Florida resident.
The bigger question is why Democrats are intent on removing the deduction cap. Isn’t it one easy way of ensuring the wealthy pay “their fair share”? Of course it is. However, they also know that it lays bare the burdensome tax rates in the most progressive states. The next question of course is, isn’t this what they want for the entire country? Higher tax rates on the wealthiest citizens? Indeed according to the rhetoric.
And this is why Democrats should never hold power. They can’t even learn from this most recent episode. The SALT cap raise taxes on the wealthiest citizens in high tax states. New York in particular saw and exodus of capital. What would be the logical conclusion if you applied this nationwide? Of course the wealthy are going to move their capital to avoid the new taxes and manage their annual income to avoid them.
The best part of this whole thing is that these proposals would actually reduce federal tax receipts by approximately $532 Billion over the next ten years. In an election where Democrats are pledging to spend trillions on free programs and green initiatives, their biggest states like New York and California actually want a policy that would reduce the money available to spend. All in the name of benefitting the 1% according the the Tax Foundation:
“Repealing the SALT deduction cap and raising the top tax rate to 39.6 percent would reduce federal revenue by $532 billion over the next 10 years. It would also almost exclusively provide tax relief to the top 20 percent of income earners, the largest tax cut going to the top 1 percent of earners.”
How’s that for your daily dose of irony?