WASHINGTON DC (October 23, 2019) — Prepared floor remarks by Senator Charles “Chuck” Grassley, Chairman, Senate Finance Committee:
This week, Democrats are using the Congressional Review Act to force a vote on a resolution that would effectively repeal an IRS regulation aimed at preventing millionaires and billionaires from exploiting a tax loophole.
This loophole would allow top income earners to save billions of dollars in federal taxes annually. New York City hedge-fund and private-equity managers would most assuredly be some of the biggest beneficiaries under this loophole. At the same time, tax-payers with incomes under $50,000 would see virtually no benefit.
In this case, one might think my Democratic colleagues would be cheering on the Treasury Department and the IRS for taking decisive action to shut down this loophole for the wealthy.
But, this isn’t the case. It’s Democrats, and only Democrats, including the Democratic Minority Leader, who are arguing in favor of allowing wealthy tax-payers to exploit this loophole.
Moreover, predominantly Democratic states have been actively promoting and bemoaning the loss of this loophole.
The loophole I’m talking about is a concerted effort by predominantly Democratic states to help their wealthiest residents get around the $10,000 cap on the deduction for state and local taxes, which has come to be known as “SALT.” And these efforts to get around the cap have been called “Blue State SALT Workarounds.”
These workarounds are essentially state-sanctioned tax-shelters where wealthy residents make payments to a state or local government-controlled fund in exchange for tax-credits they can use to wipe out most or all of their state taxes.
These states then want the federal government to ignore this sleight of hand and recognize these payments as fully-deductible “charitable contributions” when they are nothing more than state-tax payments.
Well, that’s too cute by half. It’s cheating, and these states are encouraging it, forcing the rest of the country to subsidize these tax-shelters for the wealthy.
The Treasury Department and the IRS have correctly determined that these “workarounds” are contrary to the federal tax-law and have issued sensible regulations to clarify their tax treatment. In doing so, they applied long-standing tax principles that deny a charity deduction to the extent the tax-payer receives something of value in return for their donation.
It’s simply common-sense. Charity is by definition something done out of the goodness of your heart without expecting or getting something in return.
That’s certainly not the case for these “workarounds.” There’s no charity involved. In fact, once taking into account both the state tax-credit and the charitable deduction at the federal level, a tax-payer could actually receive a tax-benefit that exceeds the dollar value of their so-called “donation.”
That’s not charity. That’s a tax scam.
Some have attempted to justify this tax-scam by pointing to state tax-credit programs that existed prior to the existence of the SALT cap. But, unlike the recently-enacted programs, these older programs were not specifically designed to circumvent federal tax-law when they were enacted.
These pre-exiting state tax-credit programs were targeted at giving tax-payers the option of funding certain non-traditional governmental activities, such as providing underprivileged children scholarships or to set aside land for conservation.
My Democratic colleagues have painstakingly tried to defend these scams by claiming they are efforts to alleviate state-tax burdens on the middle class.
However, this argument doesn’t even pass the laugh-test. It’s undeniable that these “workarounds” will overwhelming benefit the super-wealthy, while the middle class will receive little to no benefit.
To illustrate this point, I have here a chart based on a non-partisan Joint Committee on Taxation distributional analysis. It shows who would benefit from repealing the cap on deductions for state and local taxes.
While eliminating these Treasury regulations would not repeal the SALT cap entirely, it would effectively make the cap toothless as more and more states would create “workarounds.” And, let’s not forget, the repeal of the cap is their ultimate goal.
As you can see, the majority of the benefit from repealing the SALT cap, 52 percent, would flow to tax-payers with incomes exceeding $1 million. Let’s think about this for a minute.
Less than half of 1 percent of all tax-returns report income exceeding $1 million. Yet, according to JCT, these tax-payers would receive 52 percent of the tax-benefit.
Another 42 percent of the tax-benefit would go to tax-payers with incomes between $200,000 and $1 million. When combined with those earning over $1 million, fully 94 percent of the tax-benefit would go tax-payers with incomes over $200,000.
To put this into perspective, only about 7 percent of tax-returns report income exceeding this level.
Now, compare this to tax-payers with incomes under $200,000, which is about 93 percent of all tax-payers. According to JCT, this group would receive a measly 6 percent of any benefit from repealing the cap on state-tax deductions.
Only a handful of tax-payers with incomes under $200,000, about 3 percent, would actually see any benefit. 97 percent of these tax-payers wouldn’t see even one penny of benefit from taking away the SALT cap.
So there you have it. The same Democrats who have criticized the 2017 tax-law as supposedly benefiting only the wealthy are now actively pushing an agenda that would overwhelmingly benefit the wealthy.
This goes to show you how off-base Democratic criticisms of tax-reform really are. Far from being a giveaway to the “wealthy,” tax-reform was a concerted effort to provide tax-relief for everybody.
Republicans accomplished this primarily by lowering tax-rates across the board. But we also did it by repealing or limiting certain regressive tax-benefits, such as the deduction for state and local taxes. We then used that revenue to increase benefits that better target low to middle-income tax-payers.
For example, we doubled the child tax-credit from $1,000 to $2,000 and increased its refundability. We also nearly doubled the standard deduction to the benefit of many lower- and middle-income tax-payers. We likely couldn’t have made those changes if we hadn’t limited the deduction for state-taxes that mostly benefitted the wealthy.
Democrats who wrongly associate this SALT cap with a tax increase on middle-income folks simply aren’t looking at the facts or tax reform as a whole.
Two years ago, Republicans created a tax-cut for an overwhelming majority of Americans. This is true even for tax-payers affected by the deduction for state taxes.
Before tax-reform, many upper-middle-income tax-payers, particularly those in high-tax blue states, had to pay the Alternative Minimum Tax (AMT). Well, for anyone who used to pay the AMT, after you struggled through the incredible complexity of the rules, you realized an unfortunate fact. The AMT clawed back the deduction for your state tax-payments. Therefore, many of these tax-payers saw little or no benefit from this deduction before tax-reform. Democrats don’t like to admit this inconvenient truth, but it’s true.
So, yes, these same tax-payers are likely now affected by the SALT cap. But, because Republicans largely did away with the AMT and lowered everyone’s tax-rates, they still received a tax-cut.
And, let’s not forget these tax-payers no longer have to deal with the mind-numbing complexity of the AMT. Do Democrats really want middle-income families to have to go back to the nonsense of figuring out the Alternative Minimum Tax every year?
I’ve heard Democrats try to justify their efforts to undermine the SALT cap by claiming it was part of some nefarious plot against blue states. That’s simply not true.
Yes, more tax-payers in blue states are affected by the cap given the high state-taxes they face. But, the fact is on average every income group in every state saw a tax-cut under tax-reform. This isn’t just coming from “Chuck” Grassley, but an analysis by the liberal Institute on Taxation and Economic Policy. Moreover, recent filing-season data released by H&R block shows, on average, residents of even high-tax states received a tax-cut.
We have also heard fears that the cap will negatively affect blue state revenues as higher-income tax-payers flee to lower tax jurisdictions. But, concerns about such an exodus aren’t new and didn’t start because of the cap — they started because of sky-high taxes in these states.
In November of 2017, prior to enactment of tax-reform, The Wall Street Journal wrote about “The Great Progressive Tax Escape.” This article focuses on IRS tax-return data between 2012 and 2015 that showed billions of dollars in taxable income leaving high-tax states for low-tax states due to tax-payer migration. Last time I checked, there was no SALT cap between 2012 and 2015.
While there is some anecdotal evidence that tax-payer migration might be starting to increase due to the cap, it’s not entirely clear that it has. Mr President, I ask for unanimous consent to insert into the Record a Bloomberg article from May of this year titled, “Blue States Warned of a Salt Apocalypse. It Hasn’t Happened.” As this article highlights, revenues for blue states this tax season were up, not down. The rating’s agency Moody’s also released a report in April saying there were no “discernable signs” individuals were fleeing high-tax states as a result of the SALT cap.
However, even if tax-payer migration were to occur as a result of the cap, the answer to the problem is for states to look at their own tax-and-spend policies.
The truth is, these state politicians aren’t concerned about their own tax-payers. What they’re really worried about is their continued ability to gouge those tax-payers with ever-increasing state and local taxes, which used to be subsidized by tax-payers from other states through the federal tax-code.
In closing, I want to turn back to this chart I discussed earlier. For Democrats still on the fence as to whether to vote to repeal the IRS regulations on the SALT workarounds, study this chart carefully.
Could you with a straight face argue that a vote to protect these workarounds is not a vote to provide a massive tax-cut to the wealthy?
For Democrats who intend to vote for this tax-scam anyway, I don’t want to hear any more long-winded speeches about how tax-reform benefitted the wealthy.
The fact is, after tax-reform, the wealthy now shoulder a larger share of federal tax-burden than they did under prior law. This was made possible by reforms to regressive tax-expenditures such as capping the SALT deduction.
What’s more, these reforms allowed us to target more tax-relief to lower- and middle-income tax-payers.
State workarounds to the SALT cap are nothing more than state-sanctioned tax shelters. By voting to undermine that cap, Democrats are voting to enrich the wealthy tax-payers who they persistently vilify as not paying enough. Moreover, they put the tax-relief provided to the middle-class in jeopardy.
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