Treasury secretary nominee Janet Yellen side-stepped on whether she would support Democratic plans to restore the full deduction for state and local taxes paid, a break that would primarily benefit high-income earners.
Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, asked Yellen at her confirmation hearing on Tuesday whether an expanded state and local taxes deduction would be a priority in President-elect Joe Biden’s coronavirus relief package.
“Do you think it makes sense for the pandemic relief efforts to prioritize six-figure tax cuts for the wealthiest few when millions of middle-class American families are struggling to make ends meet, and would you oppose including a repeal of the SALT cap in any further relief or stimulus major?” Grassley asked.
Yellen said that given how recently the tax break was eliminated, it was “critical to study and evaluate” any potential consequences of reintroducing similar measures.
“I certainly believe in a fair and progressive tax code where wealthy individuals and corporations pay their fair share,” Yellen said. “The SALT deduction was eliminated only a few years ago, and before making a decision about what should be done looking forward, I think it’s critical to study and evaluate what the impact has been on state and local governments on their ability to provide critical services, and I promise to work with those at Treasury and throughout the administration in evaluating what impact that has had on states and local governments … on households, on small businesses.”
House Democrats passed a bill in December 2019 that would have repealed the deduction limitations imposed by the 2017 GOP tax overhaul. Even among Democrats, the measure was divisive, with 16 Democratic representatives, including Rep. Alexandria Ocasio-Cortez, voting against it.
A study from the Tax Policy Center, a joint initiative between the Urban Institute and the Brookings Institution, found that only about 9% of households would benefit from lifting the cap on the deductions.
“About 45 percent of households in the top 20 percent of the income distribution (who make $153,000 or more) would get a tax cut if the SALT cap is repealed, as would more than 9 of every 10 households in the top 1 percent,” TPC senior fellow Howard Gleckman wrote. “By contrast, only about 3 percent of middle-income households (who make between $49,000 and $86,000) would pay less in taxes than if the SALT deduction cap is retained.”
The average tax cut for middle-income taxpayers would be roughly $10. The cut for the top 1% of earners would be $30,000.
Democrats who support the tax break said that the cap deductions unfairly affect taxpayers in their states, where incomes and housing prices are higher. New Jersey Sen. Bob Menendez defended the breaks during Yellen’s hearing, saying that the federal government “can’t have state continue to be economic engines and then also be hurt, in this case, by the property tax deduction.”
“I hope when you study it, you look at the fact that there are states like New Jersey, who give billions more than we get back, and states like Iowa, that get $5 billion more than they pay in federal taxes,” Menendez said. “It should be a look at the total equation, and I hope that you will do that as part of your review.”
The cap is set to expire in 2025.
