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Analysis of the Restoring Tax Fairness for States and Localities Act

4 min readBy: Tyler Parks, Huaqun Li

Recently, Representative Tom Suozzi (D-NY) introduced legislation to remove the state and local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (SALT) deduction limit of $10,000 for two years and return the top individual income bracket to its structure and rate before the Tax Cuts and Jobs Act (TCJA) was passed in late 2017. We estimate these changes would reduce federal revenue by $18.8 billion over 10 years. The top 1 percent of earners would receive the largest tax cut and nearly all the tax benefits would go to the top 20 percent of earners.

We did not include in our estimate the increase in the cap for joint filers in 2019, nor the above-the-line deductions for teachers and first responders, in the legislation that passed the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. .

Under prior law, individuals who itemized could deduct an unlimited amount of state and local property taxes and the choice of either general sales or individual income taxes from their federal taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . The TCJA enacted a cap on the SALT deduction to broaden the individual income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and partially fund individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. reductions, including cutting the top tax rate.

The SALT deduction cap increased federal taxable income for high-income individuals. In isolation, this would increase the tax liability of high-income individuals, but given the tax reductions from other components of tax reform, including lower statutory income tax rates, a larger Alternative Minimum Tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. , and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate reduction, most of these taxpayers saw a net tax cut from tax reform.

Rep. Suozzi’s bill would temporarily remove the cap for 2020 and 2021, raise the top income tax rate to 39.6 percent from 37 percent, and widen the top bracket through 2026, when the TCJA changes are scheduled to expire.

According to our model, these changes would result in a net tax cut over 10 years, reducing federal revenue by $18.8 billion. Removing the SALT deduction cap reduces federal tax revenue by about $177 billion, and increasing the top individual income tax rate to 39.6 percent and widening the top bracket raises about $162 billion. Previously, we estimated that raising the top rate to 39.6 percent, without returning the top bracket structure to pre-TCJA law, and permanently uncapping SALT deductions would cost $532 billion over 10 years.

Table 1. Conventional Revenue Estimate

Source: Tax Foundation General Equilibrium Model, December 2019

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2020-2029
Eliminate SALT Deduction Cap for 2020 and 2021 -86.16 -90.41 0 0 0 0 0 0 0 0 -176.57
Increase the Top Rate and Restore Top Bracket Structure 24.26 25.19 26.19 27.35 28.61 29.96 0 0 0 0 161.57
Total -63.75 -67.15 26.19 27.35 28.61 29.96 0 0.00 0.00 0.00 -18.80

Table 2 shows the distributional analysis of Rep. Suozzi’s proposal. In the first year, while the cap would be lifted and the top income tax rate increased, higher-income taxpayers would see an increase in their after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. . However, from 2022 onward, taxpayers would see a reduction in their after-tax income as the cap would be reinstated but the top bracket changes would remain.

Table 2. Conventional Distribution Analysis

Source: Tax Foundation General Equilibrium Model, December 2019

Income group Change in after-tax income for 2020 and 2022
2020 2022
0% to 20% 0.00% 0.00%
20% to 40% 0.00% 0.00%
40% to 60% 0.00% 0.00%
60% to 80% 0.03% 0.00%
80% to 100% 0.85% -0.33%
80% to 90% 0.15% 0.00%
90% to 95% 0.41% 0.00%
95% to 99% 1.11% -0.06%
99% to 100% 1.63% -1.16%
TOTAL 0.47% -0.18%

Our model shows that in 2020, the top 20 percent of taxpayers would see a 0.85 percent increase in after-tax income from current law, with the top 1 percent receiving the largest bump. In 2022, these same taxpayers would see a 0.33 percent decrease in after-tax income from current law. Importantly, while the bill’s alterations would end in 2026, the expiration of TCJA would return the individual income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s to the pre-2018 structure, reinstituting a top rate of 39.6 percent along with an unlimited SALT deduction.

Rep. Suozzi’s legislation would return the structure of the top individual income bracket to pre-TCJA law by lowering the threshold at which the top rate applies. Some taxpayers, who would not be in the top bracket under current law, would be pushed into the top bracket. This group of taxpayers would get a larger tax benefit from deducting their SALT against a higher rate. For example, deducting a dollar of SALT against a 37 percent tax rate returns 37 cents for each dollar paid in SALT to the taxpayer; deducting a dollar against a 39.6 percent tax rate results in larger tax savings.

Overall, removing the SALT deduction cap and restoring the pre-TCJA top bracket structure and rate would make the tax code less progressive and would reduce federal revenues by $18.8 billion. This occurs even though the SALT deduction cap would only be removed for 2020 and 2021 and the top bracket changes would remain until 2025.

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