The ease and level in which the Republican Party has thrown fiscal responsibility out the window has been a galling display of hypocrisy that will have devastating impacts on the economic future of young Americans. But, Democrats are also showing that they too can get in on the hypocrisy game.
Demagoguing the Republican tax bill as a tax cut for the rich and warning about the dangers of income inequality is the Democratic platform of late. That is why it is surprising to hear that democratic politicians in blue states are moving legislation to cut federal taxes for the wealthy that would add to the national debt.
The issue at hand is the changes the Republican tax bill made to the state and local tax deduction (SALT). Previously, the federal tax code allowed taxpayers to deduct the amount a person pays in state and local taxes from their federal taxes. The SALT deduction was one of the largest tax expenditures in the code, costing $96 billion in 2017 and was projected to cost $1.3 trillion over the 10-year period from 2017 to 2026.
The Republican Tax Bill capped the amount of state and local taxes that can be deducted at $10,000, which is about half of the average deductions taken by those that used the deduction in New York, Connecticut, and New Jersey.
A large majority of the benefits of the SALT deduction accrue to the wealthy. Almost half of the benefits go to the top five percent and 80 percent of the benefits go to the top twenty percent of income earners. Those making less than $100,000 annually will be largely unaffected, while higher income earners will be hit by the SALT change. For example, in New York City, the effective state and local income tax rate maxed out at 7.7 percent. Under the new provision, this will go up to 12.7 percent.
New York, Connecticut and New Jersey are concocting legislative workarounds to the new federal tax provision to allow their wealthiest citizens to continue to get their federal tax breaks. One of the ideas is to set up a charity for them. Connecticut and New Jersey are setting up charitable funds that taxpayers can “donate” to instead of paying state taxes. This will allow the taxpayer to deduct the full amount of this payment because there is no cap on federal tax deductions for charitable giving.
The problem is that charitable giving has to go to charitable causes. In this case, the benefactors of the “charitable giving” are the donors themselves. How’s that for a loophole? While the Treasury Department has not weighed in on these dubious arrangements yet, they did issue a notice warning states about the validity of these arrangements, stating “Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” This is not a surprise to the proponents of the measure, and they are willing to sue.
The Democrats railed against the GOP tax bill as a giveaway to the rich. It was a fiscally irresponsible bill, but hardly a soaking of the wealthy. On the other hand, setting up charities as tax shelters is literally a giveaway to the rich. Which goes to show, Republicans do not have a monopoly on hypocrisy.