Joe Biden’s proposed $3.5 trillion spending bill pays the obligatory lip service to the “tax the rich” Democratic mantra. The details of the massive package reveal that the tax provisions include plenty of giveaways to high-income earners in blue states.
Bloomberg recently reported that analysis of the proposal reveals that proposed tax breaks for the wealthiest blue state residents would offset most of the proposed tax increases contained in the spending bill.
The tax relief bill enacted under President Donald Trump placed a $10,000 on the federal income tax deduction for state and local taxes paid (SALT deductions). Many red states have low or no state income tax and relatively low property taxes, which means the cap did not affect their total federal tax liability.
The SALT deduction is allowed only for taxpayers itemizing deductions. The 2017 Trump tax bill doubled the standard deduction amount, which led to a significant reduction in filers who itemized deductions. That change also reduced the impact of SALT deductions for many moderate earners.
States with high income and property taxes, like New York, California, and New Jersey, saw the potential for higher federal tax liability due to the SALT deduction cap.
In addition to many other reasons, the loss of the SALT deduction likely led many high-income earners in blue states to relocate to more tax-friendly states like Florida, Texas, and Tennessee. Even as residents flee blue states, places like New York are increasing state taxes. The most recent increase has pushed the top total effective marginal rate for New York City residents to 61.2 percent.
The Bloomberg analysis shows that the repeal of the SALT deduction cap would take away more than 60 percent of the tax increase that the top 1 percent of earners would pay under the Biden proposal. Taxpayers with incomes between around $165,000 and $400,000 would see a slight reduction in tax liability on average.
The Congressional Joint Committee on Taxation has indicated that a repeal of the SALT deduction would reduce federal tax revenues by about $1 trillion over the next decade.