A slice of Build Back Better could lower taxes for many in Southern California – Press Enterprise

Thousands of families in Southern California could see their tax bills drop significantly in 2022, after the House passed a social spending plan that would allow residents to avoid paying federal taxes on income already used to pay state or local tariffs.

The $2 trillion Build Back Better Act approved by the Democrat-controlled House calls for raising the allowed federal deduction for state and local taxes, or SALT, from an annual cap of $10,000, set during the Trump administration, up to $80,000 a year. That could let upper middle class residents who itemize their taxes write off much larger shares of their property, sales or state income tax bills.

“Moving that state and local tax cap up would be an important tax cut and tax relief for our Southern California communities and for California as a whole,” said Rep. Katie Porter, D-Irvine, who estimates 37% of taxpayers in her 45th District rely on the SALT deduction.

But the proposal still has to pass a divided Senate. And some complex political dynamics could make that difficult, with both Republicans and Democrats aligning against ideals they typically support.

Hard lines, fuzzy lines

While Porter and other local Democrats have been leading the charge to lift the SALT cap, other progressive leaders, such as Senator Bernie Sanders of Vermont, are fighting to preserve some form of the Trump-era policy. They cite data that shows lifting the cap would primarily benefit wealthy Americans — a move that contradicts the left’s plans to fund social and climate spending largely by raising taxes on the rich.

The change to the SALT cap is why Rep. Jared Goldman of Maine was the only House Democrat to vote against the Build Back Better Act. He said increasing the tax deduction “gives millionaires thousands in cash.”

While millionaires would benefit from the policy change as it stands, Porter and other supporters of lifting the SALT cap note that, in places like Orange County, a family of four making $175,000 is considered middle class due to the high cost of living. And for families in that income bracket, a higher SALT cap could mean paying thousands less in taxes.

That’s why Democrats and Republicans in competitive districts of Southern California found rare common ground in recent years, with members off both parties pushing for a change to the SALT cap, since it would particularly benefit homeowners in places like Los Angeles and Orange counties, where home prices and taxes are high.

But this year, as the House version of Build Back Better was negotiated to include a new SALT limit, the bill received no support from House Republicans, including some who say they want the tax change.

Rep. Mike Garcia, R-Santa Clarita, issued a video to explain whey he opposes Build Back Better, even though it would reduce the tax bill for many in his district.

“This won’t make America better, it will make it worse.”

Political punishment

The debate started four years ago, when Republicans in the House and Senate voted in favor of President Donald Trump’s tax plan.

Before 2017, Americans could deduct any amount they paid in state and local taxes from their federal incomes. The 2017 law capped those SALT deductions at $10,000 until 2026 to help pay for Trump’s lower tax rate cut for wealthy Americans.

So, while most Americans did see a slight tax reduction under Trump’s plan, an estimated 11 million Americans who live in places where home values and state and local taxes are high have seen their taxes go up.

The California Franchise Tax Board estimated that 751,000 California households making less than $250,000 have had to pay an extra $1.1 billion annually since the law took effect in 2018, or about $1,460 more each year per family. In CA-45, which stretches from Anaheim Hills through Irvine, Porter’s team estimates the average family used to save $22,000 by taking advantage of SALT deductions now capped at $10,000.

The tax increase primarily affected residents in blue states, which Trump touted as a point of pride.

“This was designed to use the tax code not to collect revenue to make investments in our economy but instead to punish certain states politically for not supporting him,” said Porter, who first won her seat in 2018 on a campaign that included opposition to the Trump tax plan.

“States are going to make different choices about their taxation systems, and they do,” Porter continued. “But I don’t think the federal government ought to exacerbate that inequality. I think it ought to treat taxpayers equally regardless of the state they live in. And to do that, we have to either lift entirely, or raise, that SALT cap.”

Time is a factor, too

Raising the SALT cap would cost the federal government an estimated $300 billion over the next five years. To offset those losses, Democrats want to double how long the policy will be in play. While Trump’s plan phases the $10,000 cap out in 2026, the Build Back Better Act extends an $80,000 cap through 2030, briefly reinstitutes the $10,000 cap for one year, 2031, and then eliminates the cap completely the following year. Porter said that makes the change “revenue positive.”

But analysts say the higher SALT cap would temporarily offset some of the Build Back Better plan’s tax increases on the wealthiest Americans to help fund policy priorities such as child care assistance and climate change protections. That’s why Sanders and Sen. Bob Menendez, D-New Jersey, are pitching a plan to tweak the House proposal so it lifts the SALT cap only for those making less than $400,000 and phases it in for people with higher incomes.

Porter, who serves as deputy chair of the Congressional Progressive Caucus, said she’s been speaking with Sanders and Menendez, and is optimistic that they’ll reach a compromise and pass some SALT cap reform in the final version of Build Back Better.

Democrats can’t afford to lose one vote in the Senate over something like the SALT cap or they’ll jeopardize President Joe Biden’s entire landmark legislation — and likely hurt their own prospects in 2022.

No House Republicans crossed party lines to vote in favor of the Build Back Better plan, despite several local GOP Congress members campaigning last year in part on promises to repeal the SALT cap.

In a statement explaining her opposition, Rep. Young Kim, R-La Habra, — who has backed standalone bills to lift the SALT cap — called the Build Back Better Act a “reckless spending and tax hike plan.”

Kim cited estimates from the Tax Foundation that said Californians would pay $14,095 more in taxes over the next 10 years. However, the Tax Foundation said those figures — which factor in estimates of how increases to corporate taxes will trickle down to individuals — come from an analysis they did on Biden’s original 2022 budget. The foundation hasn’t  completed state-by-state estimates for impacts of the Build Back Better Act yet but said they expect any increases to be “slightly lower” since the bill’s overall cost also is lower.

Those estimates also don’t take into account any new revenue collected through a beefed-up Internal Revenue Service. Kim — who cited opposition to the bill because she believes it will increase the national deficit — said she also is against funding more for tax collection. The $80 billion that Build Back Better would allot to the IRS to double its number of agents would, in Kim’s view, make it possible for the IRS “to snoop on Americans’ finances.”

Democrats argue that giving the IRS more resources simply allows the agency to better enforce tax laws already on the books. The Treasury Department estimates that a beefed-up IRS would collect enough in currently unpaid taxes to pay for other portions of the Build Back Better Act.

Wedge issue?

Locals planning to run against GOP incumbents in House races next year see the votes against Build Back Better as a political windfall.

“Orange County families are being taxed twice on the same dollar, and Michelle Steel’s solution is to vote against the SALT Tax cap repeal in the Build Back Better Act,” said Harley Rouda, D-Laguna Beach, who flipped the CA-48 seat in 2018, lost to Rep. Michelle Steel, R-Seal Beach, in 2020 and is running against her again in 2022.

Meanwhile, despite targeted local Republicans Garcia, Steel and Kim supporting SALT cap revisions, the National Republican Congressional Committee sent out a press release that bashes Democrats for supporting a federal spending bill that includes this “tax break to wealthy homeowners in New York, New Jersey, and California.”

The Senate is expected to take up the Build Back Better Act after it returns from Thanksgiving recess next week. Senate Majority Leader Chuck Schumer, D-N.Y., has said he hopes to pass the bill by Christmas.