One of the most insidious provisions of the Tax Cut and Employment Act of 2017 (“TCJA”) was the removal of the state and local tax deduction (known as “SALT”).
It was a cornerstone of the law and was touted by Republicans as a measure that would supposedly prevent state and local governments from irresponsibly collecting taxes in the future.
Now Rep. Mike Garcia was suddenly introducing laws that counter Republican orthodoxy by reintroducing the SALT trigger. Not only that, but many local Republicans cite this as one of his greatest accomplishments.
With apologies to the late Paul Harvey, perhaps we should investigate the rest of the story.
Let’s start with the earliest iterations of the TCJA, which should be a revenue-neutral tax reform (changing the way taxes are collected) rather than a tax cut. This bill was supported by both parties and resembled previous incarnations of the Republican-sponsored bill, which to some extent even received the support of the Obama administration.
The bill was originally intended to close many large corporate loopholes and to reduce the corporate tax rate from 35% to 28% without affecting income.
As the summer of 2017 turned to fall, Republicans wanted tax cuts in the name of tax reform. The bill needed 60 votes in the Senate to pass. Unfortunately for Republicans, the only way to break the 60-vote threshold was by invoking the budgetary process.
To that end, however, the tax cuts could not add more than $ 1.5 trillion to the federal budget deficit over a 10-year period.
At the heart of the TCJA was President Donald Trump’s insistence that America have the lowest corporate tax rates of any major nation. The problem was that after the corporate tax rate was cut, the 10-year budget deficit rose to $ 2.3 trillion. In order to keep the reconciliation process going, additional taxes of USD 800 billion had to be collected.
It just so happened that the eight year elimination of the SALT withholding generated $ 793 billion in tax revenue (after 2025, the SALT withholding will be reintroduced). In addition, these increased taxes would be paid primarily by taxpayers in blue states.
It was the best of all worlds for Republicans because they could pay for their tax cuts by raising taxes especially for people who wouldn’t vote for them anyway. In a previous Signal column in 2017, I wrote that Congress had never politicized the Internal Revenue Code in this way, and regardless of political views, such politicization is a bad precedent.
Taxpayers who will be hard hit by the SALT deduction waiver include those who live in the suburbs. The abolition of the SALT deduction has been cited as one of the reasons Republicans fared badly in the suburbs in the 2018 mid-term election.
Given the demographics of his congressional district, I shouldn’t be surprised that Congressman Garcia proposed legislation to reinstate the withdrawal. But one has to wonder if he is serious or if this is just a political ploy to divert attention from his January 6th vote and not accept voters from two states.
Why should Mr Garcia and the local Republicans support a bill that is diametrically opposed to the line of argument approved by the Republican Party? Maybe because they know the bill he proposed is dead upon arrival.
In general, if the proposed tax legislation reduces the federal government’s revenue, the sponsor will also need to come up with another proposal to offset the decline in sales. Over the years a large number of proposed tax breaks died because they reduced revenue.
Whenever lobbyists propose changes to tax law that will benefit their stakeholders, Congress always asks how the provision will be paid. Mr Garcia’s bill does not provide a mechanism to finance the loss of revenue and, like so many other proposed bills, it goes nowhere.
The Democrats have been talking about restoring the SALT trigger, but it will cost about $ 400 billion. You simply do not have the source of income to fund the reinstatement of the deduction.
In addition, we have to pay the costs of dealing with the pandemic. Ultimately, the government has three options: print money and bring back inflation, raise taxes, or a combination of both.
In the current environment, reinstalling the SALT fume cupboard is simply too expensive.
In fact, SALT deductions may have to be permanently lifted to fund the pandemic. This is not unexpected, as history has shown that once prints disappear, they rarely return.
For these reasons, local taxpayers are likely to continue paying higher taxes (at some of the highest effective tax rates), and legislation proposing illusory tax cuts is just throwing salt on these taxpayers’ wounds.
Jim de Bree, a resident of Valencia, is a CPA who has practiced and studied tax policy for 46 years.