As President Biden tries to get an infrastructure bill passed this month, he will run up against opposition that will slow its progress. The opposition comes not only from the Republican minority (who see a lot of pork and non-infrastructure goodies loaded in with the funding for “shovel ready jobs”), but also from his own Democratic majority (since their House and Senate majority is so slim, each individual Democrat who threatens to bail on the bill has leverage to get changes). In particular, there are seventeen Democratic Congressmen from New York who claim they will not vote for the infrastructure bill unless it comes with a repeal of the SALT deduction cap. The American public should remember that the SALT deduction is a sacred cow for Democrats from New York. Defending SALT is especially a family tradition connecting Governor Andrew Cuomo to his father Mario, who made the same arguments 40 years ago.
What is SALT? The State and Local Tax deduction. New York in 2020 had a top marginal state income tax rate of 8.8% in addition to the Federal income taxes. However, with the funding provided by Congress through SALT, residents of New York are allowed to deduct that state income tax off of their Federal income tax. W̶h̶a̶t̶ ̶d̶o̶e̶s̶ ̶S̶A̶L̶T̶ ̶d̶o̶ ̶f̶o̶r̶ ̶s̶t̶a̶t̶e̶s̶ ̶l̶i̶k̶e̶ ̶F̶l̶o̶r̶i̶d̶a̶ ̶a̶n̶d̶ ̶T̶e̶x̶a̶s̶,̶ ̶w̶h̶i̶c̶h̶ ̶h̶a̶v̶e̶ ̶n̶o̶ ̶i̶n̶c̶o̶m̶e̶ ̶t̶a̶x̶?̶ ̶A̶b̶s̶o̶l̶u̶t̶e̶l̶y̶ ̶n̶o̶t̶h̶i̶n̶g̶.̶ ̶T̶h̶e̶i̶r̶ ̶f̶e̶d̶e̶r̶a̶l̶ ̶t̶a̶x̶ ̶d̶o̶l̶l̶a̶r̶s̶ ̶g̶o̶ ̶t̶o̶ ̶N̶e̶w̶ ̶Y̶o̶r̶k̶.̶
For this reason, states like Texas and Florida have long argued that the SALT deduction should be eliminated as an unfair bailout of New York and other high spending, high state income tax states. If those states were not bailed out by the rest of the country, their state legislatures would have to think twice before so freely spending money. Until the Presidency of Donald Trump though, Republicans did not make much headway against the SALT deduction.
Schumer and the 1986 Tax Reform
During the Reagan years, Republicans came close to eliminating the SALT deduction, but were foiled by a coalition of New York politicians—some of whom are still involved in politics today. The Reagan Treasury Department’s tax reform bill of 1986, which closed an enormous number of loopholes in the tax code, was also supposed to eliminate SALT. At a 2019 meeting of the Association for a Better New York, Governor Andrew Cuomo lied about what happened with the 1986 bill. He claimed that Reagan was not pressured by New Yorkers to keep SALT, but that he “listened to reason” and acknowledged that it was “right” for SALT to remain in the bill.
That is utter nonsense. In the classic book on the 1986 tax reform Showdown at Gucci Gulch by Alan Murray and Jeffrey Birnbaum, we read that it was precisely New Yorkers with connections in the House Ways and Means Committee who threatened to kill the bill on tax reform unless SALT was retained—and it was. The Chair of that committee, Dan Rostenkowski, accepted SALT as a bargaining chip to gain Democratic support. Specifically, Representative Chuck Schumer of Brooklyn prevailed upon his fellow Democrat (and then roommate) from California, Representative Marty Russo, to make the demand. According to the book:
“‘The New York community is desperate,’ Schumer told Russo. The problems with the state and local deduction ‘were holding up reform.’ The New York representative tried to appeal to his housemate’s sense of loyalty to Rostenkowski, arguing that a major defeat loomed on the House floor if the chairman didn’t alter his course.”
President Reagan and the Republicans in Congress hardly had a change of heart about SALT. They were threatened by Democrats from New York into keeping SALT, just as President Biden is being threatened with the demise of his infrastructure bill by the same people today.
Trump’s Cap in 2017
President Donald Trump finally did some damage to SALT with his 2017 tax bill, a change that promises to save the federal government hundreds of billions of dollars. The Trump tax bill only eliminated part of SALT; it put a cap or max of $10,000 that could be deducted from federal income tax. Most middle class wage earners do not have to pay that much, so the cap approach mainly affects the wealthy in states like New York. This utterly changes the rhetoric debate.
Why would New York Democrats want to preserve tax deductions for the rich? The reason is, the rich are their state tax base, and they need those tax dollars from the rich to finance state programs. It certainly puts Democrats in an awkward position to have to defend a deduction for the wealthy though. That’s usually the Republican line of argument, that according to supply side economics, across the board tax cuts will create more jobs. All the Democrats from New York can argue is that a tax deduction for the rich will help them keep the state welfare programs going they already have, which is not a great enticement. As the 17 Democratic Congressmen acknowledge in their letter, and others cry out with alarm, the New York economy (especially NYC) has been devastated during the COVID-19 lockdowns.
What exactly is it that New York “gives more than it gets”?
However, there is one other point that Cuomo and the New York Congressmen make that can be used to argue for the deduction for wealthy New Yorkers. The Congressmen write: “New Yorkers already pay about $40 billion more in federal taxes than they receive from the federal government.” The way Andrew Cuomo has put it is that New York is a “donor state” to the others, in that it contributes more taxes to the federal budget than it gets out.
The first question to ask about such arguments is: Does the amount New York residents receive in SALT deductions surpass $40 billion? It does, so this is not a simple matter of redressing an imbalance. The second question to ask is: What form does the money New York “got out” of the federal budget come in? The answer to that more question calls into question the entire premise behind the Democrats’ claim that New York is a “donor state.” According to a July 21, 2020 Wall Street Journal article by Matthew Schoenfeld, estimates like the $40 billion cited by the New York Democrats are based on total federal expenditures, which include military personnel paychecks. Far more military men and women live and get checks in Texas than in New York; 219,000 compared to 60,000 in 2020. The total federal expenditures for those military personnel that year was $65 billion in Texas, compared to $11 billion in New York—already more than the $40 billion which was claimed to be “donated” by New York.
For a real answer as to whether New York or Texas “gives more than it gets” from the federal budget, only federal subsidies (such as food stamps) should be looked at, not total federal expenditures. Thus, we find that Cuomo and the Democrats argument for getting to keep SALT falls apart again.
Austerity is the Answer
In sum, there are two relatively new arguments against the SALT deduction cap that should be the New York Democrats’ undoing. First, that the cap only helps the rich. Second, that states receiving the deduction are a net drag, rather than a new contribution to the overall American economy. By capping the SALT deduction rather than fully eliminating it, President Trump denied the Democrats a rhetorical appeal, that they were doing it for blue collar New Yorkers. It now looks like they are doing it for rich New Yorkers and for their own political preservation.
If the two arguments cited about were better known by working class New Yorkers and the American public at large, Democratic politicians might finally be forced to face the consequences of what their state legislature has been doing for 50 years: Spending too much of other peoples’ money and lying about it in order to stay in power.
UPDATE: Thanks to my friend Jeff Hedges, who corrected something I said here. It is not true that residents from Florida and Texas get nothing from the SALT deduction because they have no state income tax, because they can still receive deductions for sales and property taxes- which amounts to 6.1% and 4.16% of the total share of SALT for those states respectively. New York’s state share is 9.06%, and California’s is 19.86% ; adjust for population differences.
Great detailed work, CJ! As I always tell my American political science classes, "Often in politics, the devil (or the angel) is in the details."
Indeed--this is well done. Since I'm not a policy guy, I cannot speak to the details--but I think the form of the argument as such has some power: Forcing a split in the liberal alliance.
Fellow pomocon Pete Spiliakos, for example, pointed out throughout the last decade that conservatives were deluded to try to turn a governor into a president, not least since the issues at state level & federal create opposite coalitions: At state level, a coalition against property taxes is a winning coalition; at federal level, there's no coalition for more tax cuts, much less for benefits cuts.
It seems to me, things like SALT could be part of a broader policy package to isolate rich liberals--show up their "privilege", so to speak--& make conservatism more popular with a majority of voters.