The first idea involves the $10,000 limit on state and local income and real estate taxes that can be deducted on federal tax returns. This so-called SALT cap was inserted into President Donald Trump’s 2017 tax bill at the last minute and hurt people (including me) who live in high-cost, high-tax blue states. But despite its origins, it has since become beloved by liberals because it hurts “The Rich.”
Starting in early 2018, I wrote numerous columns about the damage caused to ordinary people by the SALT cap, but finally stopped writing about it because I don’t like banging my head against the wall. So I let SALT slide and moved on to other things.
Now, though, the SALT cap is back in the news because Congress people from my part of New Jersey and some other blue areas are —quite properly, IMHO — pushing to eliminate the cap in return for backing President Biden’s infrastructure legislation. Or as they put it, “No SALT, no deal.”
These legislators are now being attacked for supporting a change that would help “The Rich” reduce their tax bills. There are all sorts of analyses out there, including one from the Urban-Brookings Tax Policy Center showing that a relative handful of high-income people would benefit disproportionately from lower taxes if the SALT cap disappeared.
But you know what, folks? “The Rich” aren’t the only people hurt by the SALT cap — a fact that far too few people appreciate and almost no one seems to be discussing.
Many homeowners of relatively modest means have been hurt by the cap because it has reduced the market value of their homes. Before the SALT cap, being able to deduct property taxes made homes more affordable and helped boost values above where they would have otherwise been. When the deduction vanished, the opposite happened.
And please keep in mind that home equity — a home’s market value, less the debt on it — is the biggest asset of millions of middle-class people, many of whom would be helped if the SALT cap were eliminated.
As I wrote in 2019, the SALT cap knocked about $750 billion off the value of homes, according to an analysis by Mark Zandi, chief economist of Moody’s Analytics. (The rest of the trillion-dollar hit came from new limits on deducting mortgage interest.) That’s serious money to people who’ve got a major part of their net worth tied up in their homes.
Sure, lots of really well-off — okay, rich — people would make out really well if the SALT cap were removed. But there’s a middle path. If we lifted the cap to, say, $25,000, that would help lots of middle-class people a lot but wouldn’t provide all that much benefit, relatively speaking, to “The Rich.”
One of the more interesting aspects of the SALT debate is this mea-culpa New York Times editorial. The editorial apologizes for the Times having opposed the SALT cap in the past and says that in the interests of economic justice it wants the SALT deduction eliminated even though editorial board members benefit from it.
As we used to say in Brooklyn when I was growing up there and became a Times reader: Give me a break. If you think the SALT deduction is morally wrong, you’re free not to take it. If sending more money to the IRS than the law requires makes you feel better, be my guest. But please don’t try to make third parties such as my kids, neighbors and friends pay more taxes to assuage your guilt.
I’d like to see something such as a $25,000 cap emerge, because it would help repair the financial damage the Trumpublicans inflicted on my adult children and on many of my friends and neighbors with the $10,000 cap. (I wouldn’t benefit from raising or eliminating the cap, for reasons we’ll discuss another day.)
Now, to my second point — about how helping old people can be a bad idea.
There’s a bipartisan proposal, which feels like it will become law, to let people wait until they’re 75 to begin taking (federally taxable) distributions from their defined-contribution retirement accounts such as IRAs, 401(k)s and 403(b)s. The current age is 72.
Sure, lots of older people need all the financial breaks that they can get. But raising the required distribution age to 75 would help only people who don’t need help. And would reduce federal income tax revenue for no societal gain that I can see.
Only people who have enough other income to pay their bills would benefit from raising the required distribution age. Everybody else would still have to take distributions regardless of whether the age requirement is lifted.
You’ll notice, I suspect, that I’m making the same argument here that the hold-the-line-on-SALT folks are making: Changing it would help people who don’t need help.
The difference, as I hope I’ve made clear, is that the SALT cap has caused serious financial damage to decidedly non-rich people who would benefit from changing it. But leaving the required distribution age at 72 (or even at 70½, which is what it was when I began taking required distributions) doesn’t damage anybody.
With Washington being what it is, my bet is that the SALT cap, which should be raised or eliminated, will stay essentially the same. And that the required distribution age for retirement accounts, which should stay the same, will be raised. Both those moves will be popular — but neither one will make economic or social sense.