The Trump administration's package of tax cuts for the rich was a collection of mostly bad ideas but perhaps one good one: a $10,000 cap on deductions that taxpayers can claim on their federal taxes for payments they've made for state and local taxes. Some allowable deduction for middle-income taxpayers makes sense, but so does capping the deduction for wealthier taxpayers.
Yet more than a half-dozen Democratic governors, including Illinois' J.B. Pritzker, are pressing the Biden administration to get rid of the cap so that even the wealthiest taxpayers can resume fully deducting their state and local taxes. They argue, with some credibility, that double taxation results when the full deduction isn't allowed. The politics driving this fight are complicated, but if the cap is lifted, the federal government would have to scramble to make up hundreds of billions of badly needed dollars.
The two parties have entrenched opposing positions on tax policy: Republicans tend to want to slash taxes, especially for higher earners, while Democrats tend to deride high-end tax cuts as coddling the wealthy at the expense of everyone else. But those positions have been turned on their heads by the debate over deductions for state and local taxes. While the GOP's 2017 tax package was generally a gift to the rich, the exception was the $10,000 cap on state and local tax deductions. Those paying taxes beyond the cap tend to rank among the wealthiest, which means they would be the sole beneficiaries if the cap is lifted.
A recent letter signed by seven Democratic governors alleges the cap "disproportionately targeted Democratic-run states." This is true, because most blue states have higher taxes than most red states — meaning, blue-state residents have more to lose if the cap is lifted. Some theorize that resentment over the cap could even spark movements to demand lower state taxes in Democratic states. Thus the odd sight of Democratic governors demanding that this high-end perk be put back in place, and Republicans slamming that position as a gift to the rich.
Removing the cap would cost the Treasury more than $600 billion over a decade. An analysis by the center-right Tax Foundation found that most of that lost revenue would go toward lowering the taxes of the richest 20% of the country, with the benefits increasing at the very highest incomes.
The governors' letter claims the cap "increases taxes on hardworking families," but in truth it only affects those who pay more than $10,000 in state and local taxes. Even in blue states, most Americans are well under that threshold. This is one tax-policy issue on which Republicans are right and Democrats are wrong. The cap should stay.
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