Analysis of the Restoring Tax Fairness for States and Localities Act

December 17, 2019

Recently, Representative Tom Suozzi (D-NY) introduced legislation to remove the state and local tax (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 Committee.

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 income. The TCJA enacted a cap on the SALT deduction to broaden the individual income tax base and partially fund individual income tax 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 exemption, and corporate 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 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 brackets 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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