Will High-Income Californians Get a Big Tax Break?

The House has passed President Joe Biden’s $1.85 trillion social policy package but it faces a tough slog in the evenly divided Senate.

The White House and Senate Democratic leader Chuck Schumer are being squeezed between demands from two centrist Democratic senators that the package be trimmed and warnings by those on the left, including Sen. Bernie Sanders, they might turn against the legislation if it is diluted too much.

One of the specific points of contention is something that would have multi-billion-dollar impacts on California — a partial repeal of the $10,000 cap on income tax deductions for state and local taxes, dubbed SALT.The cap, part of a Republican tax overhaul signed by former President Donald Trump in 2017, hit high-tax states such as New York and California hard. It indirectly raised federal taxes on their high-income residents and, state officials worried aloud, encouraged them to either migrate to other states with lower taxes or otherwise reduce their tax exposures.

State Says Limitation Costs Californians $12 Billion a Year

California’s Franchise Tax Board, its income tax collection agency, estimated in 2018 that the SALT deduction limit cost Californians an additional $12 billion a year in federal taxes.

Three-fourths or $9 billion of the estimate fell on Californians with incomes of $1 million or more, the tax board calculated, with the other $3 billion coming from those with taxable incomes of $100,000 to $999,999. Given the sharp growth in personal income since then, the bite is probably more like $20 billion today.

Schumer, who is from New York, and House Speaker Nancy Pelosi, who is from California, have been trying ever since the cap was imposed to either repeal or modify it, and the governors of affected states, including California’s Gavin Newsom, have been pushing hard for a change.

The version of Biden’s package that emerged from the House would raise the cap to $80,000 through 2030, then reduce it back to $10,000 in 2031 before allowing it to expire in 2032, seven years after the current 2025 expiration date. The manipulation of SALT deductions is aimed at making it pencil out, on paper, as a net gain in federal revenue over the long term.

Some See Modification as Giveaway to Rich

However, Sanders and others on the left see it as a giveaway to the rich that would violate the Democratic Party’s mantra that the wealthy should shoulder a greater tax burden.

Rep. Jared Golden, a Maine Democrat, tweeted last week that the partial repeal of the cap sounds more like something Republicans would propose, rather than top Democrats.

“Proponents have been saying that the (Biden package) taxes the rich,” Golden said on Twitter. “But the more we learn about the SALT provisions, the more it looks like another giant tax break for millionaires.”

Oddly, Republicans see the SALT modification through the same political lens, alleging that it would benefit coastal elites in California, New York and other blue states but hurt Democrats in swing states next year.

Revision Likely to Remain in Package

“I think they’re struggling to maintain their professed support for taxing the wealthy, yet they are providing a huge tax windfall under the SALT cap,” Representative Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, told the New York Times. “If your priorities are working families, make that the priority, not the wealthy.”

With heavyweight support from leading Democrats and the White House, the SALT cap modification is very likely to remain in the package — if, indeed, it garners enough votes to win final approval. We’ll know in a year whether it helps Republicans regain control of Congress.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of them working for California newspapers. He now writes for CalMatters, a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters.  For more columns by Dan Walters, go to calmatters.org/commentary.