This tax break cap can cost you money in SLO. And it isn’t changing anytime soon
Deducting state and local taxes from federal returns is highly popular in San Luis Obispo County.
In the 24th Congressional District, 35.1% of returns took a deduction — averaging $16,461 — in 2016, according to the nonpartisan Tax Policy Center.
But because of the Republican-authored 2017 tax cut law, the deduction is capped at $10,000 per return. And there’s no sign that any changes are coming soon.
The 15 most affected congressional districts, and 78 of the top 100, have Democratic congressmen, according to an analysis by the center. The 24th district’s congressman is Salud Carbajal, a Democrat.
Twenty-one of the affected districts are in California. Critics charge all this was by design, as Republicans were eager to help people in places friendly to them.
“The states affected are generally blue. They were singled out,” said Frank Sammartino, Tax Policy Center senior fellow.
A study by the Federal Reserve Bank of Atlanta earlier this year found that the 10 places gaining the least from the income tax cuts are all Democratic-leaning. California topped the list, which also included Vermont; Oregon; Washington, D.C.; Hawaii; New York; Massachusetts; Minnesota; New Jersey; and Maine.
The Democratic-run House last month tried to ease the pain, passing legislation to eventually do away with that cap. Carbajal voted to repeal the limit.
The bill’s progress has since stalled. Asked if he would consider the ideas in the House bill, Sen. Charles Grassley, an Iowa Republican who heads the tax-writing Senate Finance Committee, said flatly: ”No.”
“The economic answer is this tax bill has been so good for the economy that we should not be bringing uncertainty about the tax bill by even talking about it,” he told reporters Wednesday.
Republicans wrote the 2017 tax bill that put limits on the deduction, and got no Democratic support. GOP lawmakers argued that capping the deduction would be offset by other tax breaks, notably a reduction in rates.
Grassley said Wednesday that while the bill did not target Democratic states, it did address higher-tax states.
“From a political standpoint, our goal was to make sure that the national taxpayers weren’t subsidizing the big spending in a lot of mostly liberal states,” he said.
Without naming such states, he called them ”big population states where they don’t care a whole lot about what they spend or what they tax the higher-income people.”
Putting limits on state and local tax deductions is a way of limiting state and local taxation because it helps “help ensure federal tax policy doesn’t reward states and cities for raising their taxes sky high,” said Rep. Adrian Smith, R-Nebraska, a member of the tax-writing House Ways and Means Committee.
Data show that most people generally are paying less federal income tax because of the 2017 legislation. But in many places where the bigger state and local deduction was unavailable, the tax cut was often less than in other congressional districts.
California’s 33rd District, which covers parts of the Los Angeles area, was among the hardest hit by the change. The average SALT deduction in the district, represented by Rep. Ted Lieu, a Democrat, was $46,901 in 2016, the Tax Policy Center estimated. About 53% of tax returns included a SALT deduction.
Those with adjusted gross incomes of $75,000 to $100,000 averaged a tax cut of 1.9% of after-tax income under the 2017 tax law, according to the nonpartisan Tax Foundation. Those earning more than $200,000 averaged a 3.3% cut.
In contrast was Kansas’ 2nd District, represented by Rep. Steve Watkins, a Republican. Those earning $75,000 to $100,000 averaged a 2.3% tax cut, and the wealthiest taxpayers saw a cut of 5.59%. About 22% of the district’s returns included the SALT deduction, which averaged $8,080.
The House bill would have closed the gap. It doubled the deduction for married couples this year, and then removed the cap entirely for 2021 and 2022. It would have raised the top tax rate from the current 37% to 39.6%. The bill passed 218 to 206 on a largely party-line vote before stalling in the Senate.
Now Democrats’ best hope is that the cap becomes a big campaign issue, and they plan to push it hard.
Rep. Anna Eshoo, D-California, put the campaign pitch starkly, “It was an assault on the middle class.”
This story was originally published January 13, 2020 at 5:00 AM.
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