In the news today, I read several reports about Donald Trump’s openness to revisiting the SALT cap, the $10,000 cap placed on Federal personal tax deductions for state and local taxes paid, during budget negotiations with House Democrats.
The SALT cap was one of the fleeting interests for me back in 2017 as the GOP tax reform bill was being debated. Back then, the interesting part of the debate over the SALT cap wasn’t so much the Federal tax aspect, but rather the debates about the implications of the cap at the state level, particularly in states with a higher tax burden, like my state of New York.
I wrote about it here, and here is an article from The Motley Fool confirming that New York enacted two possible workarounds including a charitable donation credit and a voluntary payroll tax for employers so that higher income earners could avoid paying a higher share of state taxes for which they would not be reimbursed on their Federal returns, even though these taxpayers were also receiving a lower marginal Federal tax rate.
Here’s what the article says about the New York payroll tax portion of the measure:
The second workaround would allow employers to opt into an Employer Compensation Expense Program to voluntarily pay a new payroll tax of 5% on employee compensation exceeding $40,000. Employers would bear the burden of paying employees’ state taxes and deduct the cost. Because employees would see lower gross pay, there are provisions in the law to try to keep their net pay the same as before tax reform.
So, New York’s workaround for “tax the rich” conveniently shifts the incidence of such taxes to and shows up in the paychecks of any New York wage earner making over $40k (below the median income) in an insidious shell game of “guess who really pays for tax the rich.”
Now, just imagine what the politicians really mean when they say they want to implement a whole menu their dream social programs and “tax the rich” to pay for it all. To my ears, the claim has next to zero credibility whatsoever.
I am working on a post that will contain a more serious analysis of why they aren’t such great ideas, even if “tax the rich” to pay for it all were feasible, and I hope to have it done this weekend.
PS: It doesn’t matter if Trump revisits the SALT cap. The dump-and-run has already occurred – the payroll tax in New York will remain as an always-on approach to passing the tax burden to the middle class.