Democrats are pushing to lift the cap on the federal tax deduction for state and local taxes (SALT), but a Brookings Institution study says this would be a handout to the rich.
“Lifting the cap on the SALT deduction would massively favor the rich, with most of the benefit going to the top one percent,” Richard Reeves and Christopher Pulliam from the Brookings Institution wrote in a recent report.
House Democrats passed the $3 trillion HEROES Act in May. Buried in the 1,815-page relief bill is a provision that would eliminate the limitation on the deduction of the SALT for 2020 and 2021.
Democrats argue that lifting the cap would provide relief to people hit hardest by the virus, especially in devastated cities such as New York.
Under the old tax code, individuals who itemized their deductions were able to deduct all their SALT against their federal taxable income. The 2017 Tax Cuts and Jobs Act (TCJA), however, limited individual’s deduction for SALT payments to $10,000 a year ($5,000 for a married person filing a separate return). Any state and local individual income or property tax payments in excess of that amount are no longer deductible by individual taxpayers.
Blue state Democrats believe the SALT cap is unfair to their residents. Blue states, especially those with higher individual income and property tax rates, objected to this cap and even tried to create tax maneuvers to avoid this limitation.
Republicans, on the other hand, argue that the SALT deduction mostly benefits wealthy individuals and is unfair to residents in lower-tax states. They argue that lifting the SALT cap makes people in low-tax states such as Tennessee and Texas subsidize high-tax states such as California and New York.
“The main argument from some on the political left for the SALT deduction is that it encourages states to spend more by making it easier for them to tax more,” the Brookings report said…
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