The state and local tax cap, called SALT, has been the bane of many high-tax states since its passage as part of the 2017 Tax Cuts and Jobs Act. It created an effective tax hike for many high earners in high tax states, as well as many middle-class workers. That may be about to change, at least for some income earners.

 

Last week, the Senate Budget Committee, chaired by Vermont Sen. Bernie Sanders, presented a draft outline of a $6 trillion budget resolution. It included $120 billion for SALT relief over five years. Readers may recall that the controversial tax placed a $10,000 cap on the amount taxpayers could deduct from their federal income tax in state and local taxes. One of many unintended consequences was that it triggered a mass exodus of many wealthy residences from higher to lower tax states.

 

But don't break open the champagne just yet. The Sander's proposal falls far short of the cost of repealing the total tax. The Tax Policy Center estimates that in order to repeal SALT in full, the cost would be more like $460 billion over the same five years. 

 

Even so, the proposal is a victory for the caucus of 30 Republicans and Democrats from high tax states who have been lobbying for the repeal of SALT for years. They have their work cut out for them, however, in order to convince the various opposing factions between and within both parties to rescind the tax.

 

Progressive members of the Democrat Party view any change of SALT as a giveaway to the wealthy. They have a point, given that 57 percent of the benefits if SALT is repealed would fall to the top 1 percent of Americans. But what about the remaining 43 percent? Those are middle-income earners, who had fewer tax deductions as a result of the 2017 Republican tax cuts.

 

SALT also created some real fiscal problems for many states. The on-going migration from states such as New York, New Jersey, and California to places like Texas and Florida has drained the funds necessary to support schools, hospitals, police, fire, transportation and other basic services. To cope, higher tax states are forced to raise taxes even higher, which could cause even more residents to flee. Remember, too, that those large tax payments by the wealthy were largely used to support and expand social programs.

 

At the same time, receiving states, which at first applauded the tax cap that fell disproportionally on blue states, are now increasingly facing their own budget shortfalls. All these new residents expect the same basic services they enjoyed previously. These newcomers also increase the demands on existing infrastructure. Water, roads, bridges, hospitals, even the internet, may have to be upgraded as the population swells. This will cost money.

 

As a result, longtime residents of some states are suddenly seeing property taxes explode higher. Strapped for funds, legislatures, pressured by this influx of voters (many of whom are liberals), are being forced to introduce additional taxes to cope with this new demand for services.

 

A possible compromise solution to reduce the havoc caused by the 2017 tax act would be to repeal the SALT tax for those earning less than $400,000 per year. That could appease the progressive Democrats without alienating most Republicans. The cap would be lifted entirely for those under that threshold, while those over it would still be subject to the $10,000 cap.

 

There is plenty of motivation to compromise, at least among Democrats, since the cap caucus members (20 Democrats and nine Republicans) have pledged not to vote for any legislation that doesn't include a repeal of SALT. The SALT issue has already delayed the president's infrastructure plan and could hamstring his own tax plans as well. Since the Democrats cannot afford to lose even one SALT Democrat, given their slim majority in the Senate, I believe we will see some relief on the SALT taxes for at least some of the taxpaying population.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.