SACRAMENTO, Calif. — A petty tax injustice is close to getting erased — if the middle class can avoid being mistakenly labeled “rich” and undeserving.
Let me explain.
Remember the longtime federal tax break on state and local taxes that was gutted four years ago by President Donald Trump and the Republican-controlled Congress?
It may be largely restored as part of President Joe Biden’s and the Democrats’ $1.85 trillion social safety net bill that Speaker Nancy Pelosi hopes to bring to a vote this week in the U.S. House.
Before the Trump-GOP butchery, we could deduct all state income and local property taxes on federal returns.
But Trump and Republicans placed a $10,000 cap on deductions for state and local taxes, called SALT in government speak. Prior to that, the average SALT deduction in California exceeded $18,400.
The state Franchise Tax Board reported that in 2018, the SALT cap cost Californians $12 billion. The Washington-based Institute on Taxation and Economic Policy has estimated that in 2022, the SALT cap hit on Californians will be $33 billion if the law isn’t changed.
On the flip side, the 2017 tax bill did help nonitemizers. Standard deductions were nearly doubled and so were child credits. And important for upper-middle-class taxpayers, the alternative minimum tax was lowered.
So, the entire GOP tax act shouldn’t be repealed. But the SALT cap definitely needs an overhaul.
Why was it enacted in the first place? Two reasons.
The higher federal revenue from personal income taxes was needed to pay for corporate tax cuts.
For Trump and the GOP, the cap also was a stinging jab at high-tax blue states led by Democrats — states such as New York, New Jersey and California.
The cap wasn’t a big deal in many red states that have low taxes or no income levies at all — such as Texas, Florida and Alaska.
Then-Gov. Jerry Brown didn’t waste words, charging that Republican congressional leaders were “wielding their power like a bunch of Mafia thugs.”
Gov. Gavin Newsom and six other Democratic governors sent Biden a letter in April urging him to “undo the cap.”
“For the first time since Abraham Lincoln created the federal income tax, the cap on SALT deductions established a system of double taxation,” the governors wrote, explaining that “Americans were forced to pay taxes on the amount they paid in state, local and property taxes.”
“Capping SALT was based on politics, not logic or good government,” the governors continued. “This assault disproportionately targeted Democratic-run states….
“In short, middle-class Americans are struggling under this federal tax burden while corporations — which are still able to fully deduct SALT as business expenses — are profiting because of the same law.”
The middle class is at the center of the dispute. Some liberal lawmakers and think tanks contend that repealing the cap would be an unwarranted giveaway to the rich and of little benefit to the middle class.
Nonsense. But forget about a total repeal.
House Democrats, led by New Jersey members and including California Rep. Katie Porter, are pushing to raise the cap. The latest target is $80,000.
But even if that higher cap passes the House, it almost certainly will be changed in the Senate.
Sen. Bernie Sanders (I-Vt.), the Budget Committee chairman, has said the House proposal is too tailored for the rich and “is unacceptable.”
Sanders and Sen. Robert Menendez (D-N.J.) have proposed eliminating the cap entirely for taxpayers earning less than $400,000. Above that income, the $10,000 cap would be phased back in.
Steve Wamhoff, an analyst at the Institute on Taxation and Economic Policy, says that the House plan would cost twice as much as the Sanders-Menendez version — more than $60 billion annually compared with about $30 billion.
With an $80,000 cap, he says, “most dollars would go to the richest 5%.” The $400,000 income lid “gives very little to the top 1%,” he adds, but “in California, 86% of the benefits would go to the top 20%.”
Falling in the top 20% of California earners hardly means that a family is rich. It can hit that mark with pay of about $110,000, says the state Franchise Tax Board based on 2019 data, the latest available. You’re in the top 5% with family earnings of about $270,000 — very comfortable, but not exactly mega-rich in high-cost California.
What’s considered rich in some states is basic middle class in much of California. We’re plagued with unaffordable housing. Southern California’s median home price in September was $688,500. In Los Angeles County, it was $795,000, more than twice the national average.
The high housing values can translate into steep property taxes, even with low rates under Proposition 13. Our state income taxes are by far the nation’s highest. Gasoline prices are also steeper than in other states.
A SALT change wouldn’t benefit just rich Californians. It would benefit many middle-class taxpayers too.
The state Finance Department analyzed what an $80,000 cap would mean for Californians. It calculated that 2.3 million taxpayers would potentially benefit by being allowed to deduct an additional $43 billion. Of those taxpayers, 1.3 million earn less than $175,000. Their deductions would increase by $9 billion.
“It’s pretty clear from the data that a SALT change doesn’t solely benefit the richer class,” Finance Department spokesman H.D. Palmer says. “Hundreds of thousands of California taxpayers whose incomes fall far below the top of the heap would benefit.”
Revamping SALT “may impact wealthy people more, but middle-income people benefit as well,” says Rep. Mike Thompson (D-St. Helena), who long has pushed for lifting the cap.
“I think we’ll get something. It’s not soup yet. It’s still cooking.”
Almost anything would taste better than what’s being served now.
(Political columnist George Skelton has covered government and politics for nearly 60 years and for The Los Angeles Times since 1974.)
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