How Biden’s Build Back Better Hits Blue States Stronger

Democrats who control Congress understand that states and blue districts would benefit disproportionately from the reinstatement of the Total Uncapped Tax Deduction (SALT), which was capped at $ 10,000 under the Tax Cuts & Jobs Act. 2017. That’s why Democrats on the Hill continue to push to repeal the SALT deduction cap, even though it would result in a tax cut that would massively benefit high-income households while making it harder to pay claims. spending by progressives.

“If they add the repeal of the SALT cap, Democrats will cut taxes for the wealthiest Americans,” Marc Goldwein, policy officer at the Committee for a Responsible Federal Budget (CRFB), tweeted October 30. It would be difficult to defend on what will already be a tough election campaign in 2022 for many Democratic members of Congress.

If Democrats refuse to repeal the SALT deduction cap due to the obvious political pitfalls and tax challenges it would create, they could redeem themselves with voters in the Blue State and cities that could benefit from a SALT deduction. uncapped by removing the increase in capital gains tax. currently included in the Build Back Better framework. That’s because the capital gains tax hike proposed by Biden and the Congressional Democrats will disproportionately harm Blue States and Cities, both their residents and public finances. Democratic members of Congress could help Sacramento, Albany, Trenton, New York, Los Angeles, San Francisco and other Democratic-dominated jurisdictions by removing the higher federal tax rate on capital gains.

“In the United States, long-term gains are currently subject to a maximum marginal tax rate of 23.8% at the federal level, the result of a maximum tax rate of 20% on capital gains plus a 3.8% net investment income tax, “says Erica York, an economist at the Tax Foundation.” The Build Back Better proposal would apply a new 8 percentage point surtax to the higher adjusted gross income (MAGI) to $ 25 million, including on capital gains income. “

“The resulting top marginal tax rate of 31.8% would be the highest federal capital gains tax rate since the 1970s, and higher than the generally estimated revenue maximization rate of 28%.” , adds York. “Including state-level policies, the average highest combined marginal tax rate on capital gains in the United States would rise to 37%, compared to 29% under current law.”

A combined average federal and state capital gains tax rate of 37% does not compare favorably with China’s 20% capital gains tax rate or China’s average capital gains tax rate. almost 19% for the European trading partners of the United States. But a handful of states, almost all Democrat-led, would find themselves at an even greater competitive disadvantage.

If President Biden signs off on his capital gains tax increase proposal, six states would have a combined federal and state capital gains tax rate above 40%. Those six states – New York, New Jersey, California, Vermont, Oregon, and Minnesota – all voted for Joe Biden in 2020 and all have fully Democratic-led state governments except Minnesota, where Republicans control the State Senate.

The blue states that would have the highest combined capital gains tax rates under the Build Back Better plan are also among the most reliant on capital gains income and, therefore, would suffer disproportionately from the enactment of an increase in the federal capital gains rate. In the California of Nancy Pelosi and Kamala Harris, for example, capital gains tax receipts represent 10% of overall state general fund revenue. Along with California, the progressive strongholds of Massachusetts and New York also have, relative to the 50 states, the highest share of total income consisting of capital gains.

High-income Blue State and City residents won’t be happy if their SALT deduction remains capped at $ 10,000. But as Goldwein of the CRFB has it underline, if Democrats vote to repeal the SALT deduction cap, “they will offer a net tax cut to the rich and lose all credibility on tax fairness.” There is a clear trade in prospect for Congressional Democrats who find themselves in this predicament of abandoning the increase in the capital gains tax that will disproportionately harm their constituents and the finances of the ‘Blue State to redeem itself not to uncapped the SALT deduction.