Crushed by the weight of growing budget commitments on top of reduced revenues, blue states are clamoring for a tax break that would benefit high-income earners.
The 2017 Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, limited the amount of state and local taxes individuals could deduct to $10,000. The change has had a significant effect on high-tax states, prompting many upper-income people to move to states with lower tax burdens.
Senate Majority Leader Chuck Schumer (D-NY) told reporters at a July 14 news conference that if he becomes majority leader, Senate Democrats would make it a priority to eliminate SALT.
“It will be dead, gone and buried,” Schumer stated.
House Democrats tried to get a two-year reprieve on SALT in the coronavirus relief bill in May, but the proposal got no traction in the Republican-led Senate. Democratic presidential candidate Joe Biden supports repealing the cap.
A report from the Brookings Institution, entitled “The SALT Tax Deduction is a Handout to the Rich,” published September 4 states the losses for the rich from this one provision are greater than all the gains they realized in the 2017 tax reform legislation.
“Almost all (96 percent) of the benefits of the SALT cap repeal would go to the top quintile (giving an average tax cut of $2,640); 57 percent would benefit the top one percent (a cut of $33,100); and 25 percent would benefit the top 0.1 percent (for an average tax cut of nearly $145,000),” write Christopher Pulliam and Richard V. Reeves.
The Medicaid Connection
One issue that could be prompting the call to expand the deduction that would benefit high earners is the growing Medicaid budgets of states.
“Medicaid growth has been exploding for years and Obamacare made the problem even worse,” Nicholas Horton, research director at the Foundation for Government Accountability. “Medicaid now consumes nearly 1 out of every 3 dollars states spend, which is truly staggering.”
Horton co-authored a June 10 report, “States Are About to be Hit with a Medicaid Tidal Wave,” which states Medicaid enrollment could soar by nearly 55 million people, and Obamacare expansion states will be hit the hardest.
“Medicaid growth has greatly accelerated since the pandemic began–and not just because of government-imposed lockdowns but because Congress tied states’ hands and removed their ability to manage their own Medicaid programs,” Horton told Health Care News. “States can’t remove individuals for Medicaid, even as they’re going back to work and regaining their incomes. It’s most severe in states that expanded Obamacare; and it’s an all-out assault on the safety net.”
When reports began surfacing in 2018 of notable high-net-worth individuals leaving high-tax, Medicaid-expansion states such as California, New Jersey, and New York, Chris Edwards, director of tax policy studies at the Cato Institute, wrote in the Daily Caller on October 2, 2018, “The Democrats who dominate high-tax states need to rethink their policies. It does not advance their progressive goals to push out the wealthy because those are the folks who create jobs and grow the economy.”
AnneMarie Schieber (amschieber@heartland.org) is managing editor of Health Care News.