When the White House released the new framework for the “Build Back Better” (BBB) reconciliation bill yesterday, repealing the cap on the State and Local Taxes (SALT) deduction was not included. That was good news, because none of the surviving BBB provisions manage to combine a huge price tag with benefits for the wealthiest Americans that a SALT cap repeal would. Despite being excluded from the framework, it looks like a SALT cap repeal is still in play. While federal tax policy is seldom a topic for an education scholar like me to raise, this is an exception. Why? Because a single education number puts perspective on the cost of a SALT cap repeal, which is far larger than total annual federal spending on public schools.
Prior to 2018, SALT taxpayers who itemized their deductions could deduct property taxes and either income or sales tax paid to state and local governments from their federal taxable income. The Tax Cuts and Jobs Act (TCJA) capped that deduction at $10,000 while increasing the standard deduction from $12,000 to $24,000 for joint filers, scaled back the alternative minimum tax, and reduced statutory tax rates. The $10,000 cap on the SALT deduction greatly reduced the amount of state and local taxes taxpayers could deduct, but due to other offsetting changes most taxpayers ended up with tax cuts on net.
Lawmakers are now considering a proposal to temporarily repeal the SALT cap while leaving the other tax cuts passed as part of the TCJA in place. A repeal of the SALT cap would heavily reward the wealthy and nobody else, and is a standout example of regressive tax policy.
How regressive? Well, according to the non-partisan Tax Policy Center, about 90 percent of the benefit from full repeal of the SALT cap would go to households in the top 10 percent of income. Half the benefit would go to the top 1 percent. Fully 24 percent would go to the top 1/10th of one percent.
Projected tax savings make the gaps clearer. Average tax breaks for the top 20 percent by income would be about $2,920. That is 146 times the relief the middle-income quintile would get — on average about $20. For the bottom 40 percent, the benefit literally rounds to $0.
However astoundingly regressive, the main reason to object to the SALT cap repeal is the price tag: $180 billion over the next two years. In a $1.75 trillion package, the scale of that price tag can get lost, but Federal K-12 education spending provides some context. All in, 2019 federal K–12 spending was roughly $62 billion in today’s dollars. That is far below a full SALT cap repeal’s $90 billion annual price tag.
Of course, those pre-COVID amounts do not reflect the record federal spending of about $190 billion in COVID-19 relief funds for schools. I have written about those funds, and argued they were excessive, poorly targeted, and susceptible to waste. Next to the comparably priced SALT cap repeal, that relief spending looks brilliant.
The absence of the SALT cap from the White House framework does not mean it won’t be in the final bill. With a razor thin margin, key moderate democratic congressional votes still promise “No SALT, No deal,” and are confident in their chances. Combine those bare-knuckle politics with a conspicuous gap between the BBB frameworks’ spending and revenue projections — totaling at least $145 billion — and there is clearly room for last minute adjustments or budget gimmicks to shoehorn in the SALT repeal.
It is quite plausible that the SALT caucus will only get a partial repeal, like doubling the SALT cap for joint filers. That would be marginally better, but would still be regressive and would still exceed Federal Title I spending for students in poverty.
With my focus on schools, I usually leave federal tax policy to tax experts. However, in this case, federal education spending helps to put the scale of the error of a SALT repeal in perspective. It’s plausible, even likely, that the Democrats will Build Back Better by giving the wealthiest Americans a tax break worth more than the federal government spends on public schools. Responsible Democrats should be held accountable if they let this mammoth regressive measure become law.