Many rich fretting about SALT didn’t get that tax break anyway

Politicians in mostly Democratic high-tax areas say the new federal cap on state and local tax deductions hurts their residents. Yet the vast majority of those taxpayers never actually got the break in the first place, undermining a key criticism of the Trump tax overhaul.

About three-quarters of people who in past years paid more than $10,000 in state and local taxes had been required to take the alternative minimum tax, meaning they couldn’t have written off the SALT levies anyway, according to IRS data analyzed by Bloomberg. And because the AMT has been scaled back as well, those top earners in fact get a new tax break by now being able to write off up to $10,000 of their SALT payments.

Bloomberg analyzed IRS data from 10 of the wealthiest counties in the U.S. – including New York’s Westchester, New Jersey’s Somerset, Connecticut’s Fairfield and California’s Marin counties.

The numbers could deflate some of the heated rhetoric over the 2017 tax overhaul, the Republican Party’s signature legislation of the Trump era. Since the law was enacted, governors and lawmakers from high-tax states have decried the change as a GOP assault on Democratic strongholds. New York Gov. Andrew Cuomo called it an “economic civil war.”

“A lot of folks are coming in assuming they’re going to lose under the new tax law when in fact, they’re not,” said Ryan C. Sheppard, an accountant at Knight Rolleri Sheppard in Fairfield, Connecticut. “In many cases they’re doing better because in prior years the alternative minimum tax disallowed all their state and local tax deductions. Now they’re at least getting $10,000, where they got zero before.”

The 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes at $10,000. That set off campaigns to eliminate the provision by politicians in states with high income taxes and high property taxes, which tend to be Democratic states.

Cuomo predicted that limiting the deduction to $10,000 would wreak havoc for the budgets of New York and states in similar circumstances. He formed a coalition of like-minded governors from eight states, all of them Democrats, to insist that Congress repeal that provision.

Democrats in Congress have introduced legislation to do that, but there’s little appetite to move forward on it, given that the main Democratic talking point on the new tax law is that it benefits the wealthy. Fighting to restore the full deduction for SALT would step on that argument.

And in the Republican-controlled Senate, Chuck Grassley, chairman of the Finance Committee who represents lower-tax Iowa, has declared any attempt to restore the full SALT deduction dead on arrival.

The cap on SALT deductions, as well as the repeal of some other deductions for home mortgages, will bring in $668.4 billion in tax revenue over a decade, according to the congressional non-partisan scorekeeper, the Joint Committee on Taxation.

Cuomo says the SALT deduction cap could rob the state’s coffers if residents pressure local lawmakers to lower taxes, or worse, move out of the state to lower their taxes – ultimately calling into question New York’s long-term viability. He’s said it would raise New Yorkers’ total tax burden by at least 20 percent.

“I’m afraid we’re at that tipping point,” Cuomo said earlier this month. “There is nothing more serious than this.”

Top earners in Manhattan, or New York County – those earning at least $200,000 and up into the millions of dollars – paid an average of $144,189 in SALT in 2016, according to IRS data, so being able to write off less than 10 percent of that would be a big, and costly, change.

But the effect will largely be felt by those making $1 million or more, accountants say.

The reason is that 74 percent of those top earners fell under the AMT, a backstop to prevent the wealthy from whittling down their tax bill by piling up deductions and credits. So the fact that they now can write off up to $10,000 of their SALT payments reduces their overall tax burden and effectively gives them a tax break they didn’t have before.

This year is the first filing season under the GOP tax law overhaul, which cut tax rates for all income levels. Those reductions were partially offset by curbing some deductions and exemptions, leading to a wide array of outcomes for taxpayers depending on their personal situations.

The law also included several changes that disproportionately benefit the wealthy. The law cut the top tax rate to 37 percent from 39.6 percent. And it offered a new 20 percent deduction for owners of partnerships and limited liability companies and reduced the number of people subject to the estate tax.

The tax law also largely scaled back the AMT. About 62 percent of people making between $500,000 and $1 million paid the AMT before this year. Now only about 2 percent of those filers will have to pay the AMT, according to estimates from the Urban-Brookings Tax Policy Center.

Tax accountants are finding that many of the people who used to use the AMT are using SALT deductions, even though limited, to their benefit.

For example, a taxpayer who made $200,000 and had $37,000 in SALT payments owed $44,760 in federal taxes under the AMT before the tax overhaul. This year, that same taxpayer would now be able to deduct $10,000 of his or her SALT payments and the federal tax bill would go down by about $3,000, to $41,715, according to Steve Rossman, a shareholder at accounting firm Drucker & Scaccetti in Philadelphia.

For the sliver of top earners who didn’t pay the AMT, the war cries of Cuomo and other Democratic politicians hit home. About one-fourth of taxpayers in Connecticut’s Fairfield County who earn more than $200,000 had an average SALT bill of $80,564 and weren’t subject to the AMT, so they could lose an average of $70,000 or more worth of deductions.

“For them it’s devastation. It feels like an earthquake to them,” Karen Brosi, a tax accountant in Palo Alto, California. “They’re already paying extraordinarily high state income taxes. Now, they very truly are not getting any federal tax benefit from those and in fact are finding that their federal bill is going up.”

New York officials fear the state will bear the brunt of the SALT cap to the tune of $14 billion annually. The tax plan’s harshest effect falls on the top 1 percent of earners, who account for 56 percent of the state’s revenue, said Robert Mujica, New York State budget director.

New York designed its tax code around state and local tax deductibility, which has been a feature of federal tax law since the income tax was introduced in 1913. It’s “unacceptable” for the federal government to target New York’s tax base, Mujica said in an interview.

“No other state is going to have as many people who pay more than New York,” he said. “That’s the fundamental issue.”

Sen. Bob Menendez and Rep. Bill Pascrell, both New Jersey Democrats, are pushing a bill to fully restore the SALT deduction and have proposed to pay for some of that by returning the top marginal tax rate to 39.6 percent.

But some of the complaining about the new tax law is just “crying wolf,” Rossman said.

“The politicians are leading their constituents, but the constituents are drawing conclusions without knowing what’s happening to themselves,” he said. “Some people will realize that under the old law they were actually paying more.”

(Davison reported from Washington and Goldman from New York)

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