The sweeping social spending and climate bill that House Democrats passed on Friday morning includes a temporary repeal of a Trump-era limit on the state and local tax deduction – a policy that would deliver huge windfalls to the wealthy while providing almost no benefit to middle-class Americans.
That’s according to a new analysis published Thursday by the left-leaning Urban Institution Tax Policy Center, which examined two separate plans by Democrats to raise the so-called SALT deduction cap from the current $10,000 threshold.
The House version of President Biden’s Build Back Better plan would raise the amount of state and local taxes that Americans can deduct from their federal bill to $80,000.
Meanwhile, Senate Democrats – led by Bernie Sanders of Vermont and Bob Menendez of New Jersey – are angling to cap the tax break by income, making it unlimited for individuals earning about $400,000 and phasing it down above that amount, warning the House plan could be a boon to rich Americans.
But the Tax Policy Center analysis shows that both plans would ultimately benefit the top sliver of U.S. households.
“The plan Sanders, Menendez and other Senate Democrats are developing would be only a modest improvement over the House’s $80,000 SALT cap,” the Tax Policy Center’s Howard Gleckman and Len Burman wrote in a blog post. “The House plan would produce a huge windfall for the very rich. The Senate would limit its windfall to the merely rich. And neither would do much at all for middle-income households.”
About 94% of the benefits in the House’s SALT plan would go to the top 20% of earners, or those earning about $175,000 or more. In the Senate plan – which provides unlimited benefits to anyone earning less than $400,000 – about 88% would go toward the top fifth of households.
The biggest difference between the plans is how much individuals at the very wealthiest individuals would benefit. The House plan, which raises the cap to $80,000 without limitations for five years, would see one-third of the benefit go to the top 1%, or those making nearly $870,000 or more. The top 1% would only get 0.1% of the benefit the $10,000 SALT cap is gradually restored beginning at $400,000.
Middle-income households would get an average tax cut of about $20 in 2021 from either proposal – largely because only about 10% of taxpayers actually itemized their deductions.
“Each proposal would encourage a relatively small number of these households to become itemizers,” the analysis said. “But even for them, their tax savings would be small.”