Such a change would definitely be a windfall mostly for top earners, experts say. And lifting the limits retroactively, as Pelosi has suggested, would only make matters worse, while not offering many benefits to state governments that are also getting hammered by the current crisis.
“This is not a good idea,” said Michael Linden, executive director of the progressive Groundwork Collaborative. “It would not help the economy heal, and it would not benefit the people who need help.”
More than half of the proceeds from fully repealing the SALT cap would go to the top 1 percent, households making more than about three-quarters of a million dollars a year.
Pelosi hasn’t spelled out exactly what changes she would like to see to the SALT cap, which was imposed by the 2017 GOP tax law — and that has made it difficult to gauge exactly what kind of role Democratic proposals to change the cap would play in a fourth congressional virus response or the effect it could have on the economy.
The speaker first floated the idea in an interview with The New York Times published on Monday. Henry Connelly, a spokesperson for Pelosi, later clarified that any changes “would be tailored to focus the benefits on middle class earners and include limitations on the high-end.”
Still, it’s not too hard to see what Pelosi might be trying to do, and why other Democrats might be cheering her on. Gov. Phil Murphy of New Jersey said on Tuesday that he urged Pelosi to lift the cap in a pair of conversations just this week.
House Democrats, who made large gains in upscale suburbs as they took the majority in the 2018 elections, targeted the SALT cap all last year and eventually passed a measure to kill it for two years. That bill has no chance in the GOP-controlled Senate, where few states represented by Republicans are all that troubled by the $10,000 limit.
Democrats and real estate advocates have also charged that the SALT limits have dragged down the housing market, an argument that has been backed up by some government economists.
As it stands now, the families that would benefit from SALT cap relief might not get much of a boost from the $1,200 direct payments Congress just passed to help families weather the crisis. That’s because the payments phase out for upper-income taxpayers.
But changes to the SALT deduction would allow households to refile their taxes for 2018 and 2019 to get a refund, giving them an influx of disposable income. That would will allow them to support businesses in their communities that will need help getting back on their feet, according to Pelosi and other House Democrats.
“We know a lot of the areas that are getting hit hardest by the coronavirus were hit by SALT, too,” said Rep. Josh Gottheimer (D-N.J.), who represents a wealthy district outside of New York City. “Many small businesses have been crushed by this. We have to help them get back online.”
House Democrats considered pushing to ease the cap on state and local deductions in the “phase three” coronavirus measure that was signed into law last week, Gottheimer added. But that measure was mostly crafted through negotiations between the Senate and the Trump administration, forcing House Democrats to regroup and start preparing for phase four.
It’s not clear what Democrats might have in mind to keep the rich from benefiting too much from SALT changes, though they have previously discussed limits based on income and geography.
In any event, experts have their doubts that relaxing the $10,000 cap on state and local deductions is the best way to nudge Americans toward shopping in their local stores when the coronavirus lockdowns subside.
As Karl Smith of the conservative Tax Foundation noted, tax cuts aimed at getting more money in people’s pockets work better when aimed at households that can make the most use of it.