SALT of the Earth. The Trump Administration pushed through a change to the US tax code which capped the deduction for State And Local Taxes (SALT) at $10,000 per year. Previously there had been no cap. The imposition of the cap effectively increased the federal taxes paid by high-income earners, especially in high tax states / localities. Given that many high-income, high-tax areas in the U.S .are solidly Democratic, this loophole reduction rankled Democrats in the Congress. Those Democrats have made several unsuccessful attempts to repeal the cap.
Democrats are likely to win the presidency in the upcoming election and may take control of the U.S. Senate as well. If that happens, it is likely that they will make good on their prior efforts to remove the SALT cap. In Virginia, Democrats control the House of Delegates, the Senate and the Governor’s mansion. They have used that control to raise state taxes including the passage of a number of hidden taxes that have been implemented through regulation. If Joe Biden is elected, will the hidden taxes imposed by Virginia’s Democrats put the state’s residents at a disadvantage since they won’t be deductible when the SALT cap is lifted?
Biden’s taxes. Joe Biden spends a lot of time on the campaign trail talking about how he won’t raise taxes on people making less that $400,000 per year. He seems to consider that level of income to be a point of demarcation between middle-class and high-income Americans. In order to drive the point home Biden claimed that he personally never made more than $400,000 a year during a speech in Detroit. That was a lie. Biden’s claim that he will raise taxes on those making over $400,000 per year may be true. However, he has never claimed that all of his tax changes will raise taxes on the wealthy. There is ample evidence that the Democrats want to rescind Trump’s SALT tax cap which would clearly lower taxes on the wealthy. Biden’s own tax returns are illustrative. As The Motley Fool reports, “In 2018, Democratic presidential nominee Joe Biden and his wife took a $10,000 deduction for state and local taxes on their federal tax return (the most recent tax return available for review).” “If the law hadn’t changed and no $10,000 limit had been imposed, the Bidens would have been able to deduct the entire $361,966 they paid in state and local taxes in 2018. Effectively, the SALT cap reduced the Biden’s tax deductions by nearly $352,000.”
Will the Dems revoke the cap? Given the level of rhetoric Democrats have put forth on Trump’s “tax cuts for the rich” one might assume that they would be loath to rescind a law passed during the Trump Administration that raised taxes on the rich. Making that assumption would be a mistake. The Democrat- controlled House of Representatives proposed a provision in the Coronavirus relief bill (the HEROES Act) that would have repealed the cap for 2020 and 2021. That bill is unlikely to pass the Republican-controlled Senate. In 2019 the House tried to remove the cap. That bill was killed by the Republican controlled Senate. Chuck Schumer has been emphatic saying in July that if he becomes the the majority leader of the Senate the SALT cap will be “dead, gone and buried.” In the case of the SALT cap, tax breaks for the rich are very much on the Democratic agenda.
Who pays more taxes because of the SALT cap? As can be seen above, Joe and Jill Biden paid a lot more in federal taxes with the deduction cap of $10,000 rather than being able to deduct the full $361,966 they actually paid in state and local taxes. The Center on Budget and Policy Priorities (CBPP) analyzed the impact of the Democrat’s attempt to revoke the SALT cap for 2020 and 2021 as part of the HEROES Act. The CBPP writes, “The top 1 percent of households would receive 56 percent of the benefit of repeal, and the top 5 percent of households would receive over 80 percent of the benefit, while the bottom 80 percent of households would receive just 4 percent …” And before one of the aged liberals on this blog tries to shoot the messenger, Wikipedia notes that “The Center on Budget and Policy Priorities (CBPP) is a progressive American think tank…”.
You can’t deduct hidden taxes. Once upon a time Virginia was a low-tax state. That status was lost through a succession of free-spending governors. From Bob McDonnell’s transportation taxes to Ralph Northam’s attempts to put out the fires of injustice by smothering the flames with stacks of tax dollars, taxes have been rising in The Old Dominion. While the tax hikes have been bipartisan, the methods of taxing have become far stealthier under the Northam Administration. There were always the sky-high road tolls in Northern Virginia for the “privilege” of driving on what would be free roads elsewhere in the state. The wholesale gasoline taxes that are paid by the consumer but not recognized as an individual tax. The assessing of higher-than-necessary tuitions on some college students so that tuition subsidies can be offered to other students. These are all taxes disguised as something else. Northam has added a wealth transfer tax accomplished through regulation of the state’s electricity monopolies, debt forgiveness accomplished by spending refund money that should have been returned to those overcharged and “free” financing of delinquent rents through the suspension of eviction laws and the requirement for landlords to establish payment plans for renters. I’m sure there are more. All of these measures have been helpful to the fiscal sleight-of-hand artists in the General Assembly who love to raise taxes but hate to be seen doing so. Unfortunately, invisible taxes can’t be recoded as deductions on federal tax returns.
Honesty and tax reform. If Biden and the Democrats win and repeal the SALT cap, the federal government will be offering a subsidy for the transparent taxation of relatively high-income Virginians. The effective tax rate for high- income earners in Virginia has been estimated at 7% (vs 9.2% for middle 20% earners). At 7% in state and local taxes it takes an income of $142,857 to reach the SALT cap limit of $10,000. Of course, that’s true only if the entire 7% paid is in the form of deductible state and local taxes. After that income level, deductible state income taxes and local property taxes are subsidized by the federal government. As a side note, the median household income in Loudoun County in 2018 was $139,915. Almost half the families living in Loudoun are at an income level where the SALT cap could matter.
In order to maximize the benefits associated with lifting the SALT cap Virginia’s Democrat-controlled legislature and Governor would have to end the rampant dishonesty and opaqueness in revenue collection present in existing code and move to a simpler, cleaner, more graduated income tax structure. Localities would have to focus on revenue generation through transparent deductible taxes.
Side note: This is an important issue. The facts I have presented are, to the best of my knowledge, accurate. However, I am not an accountant and definitely not a tax accountant. If there are factual errors in this article please note them in the comments and I will make any changes I deem appropriate.