Pelosi Pitches a Blue-State Bailout She wants to use virus relief to aid progressive state governments.
https://www.wsj.com/articles/pelosi-pitches-a-blue-state-bailout-11585697310?mod=opinion_lead_pos2
House Speaker Nancy Pelosi held up last week’s coronavirus relief bill with demands related to corporate diversity, carbon emissions and election reform. But Democrats are far from finished using the crisis to try to force through partisan priorities they couldn’t pass in normal times. Mrs. Pelosi is now hinting the price for further economic relief may include expanding a regressive tax deduction for high-earners in states run by Democrats.
On Monday Mrs. Pelosi told the New York Times she wanted Congress to “retroactively undo SALT.” In the 2017 tax reform, Republicans limited the state and local tax deduction to $10,000. That raised federal tax revenue mostly from high-tax parts of states like California, New York and New Jersey and helped pay for the rate cuts on corporate, small business and individual incomes. According to the Tax Foundation, the cap raised almost $33 billion in 2018 from those earning more than $1 million per year and had little impact for those earning less than $100,000.
Democrats have been trying to repeal the SALT cap since tax reform passed. They’ve tried lawsuits, state-level accounting gimmicks and acts of Congress. The last House bill repealing the SALT cap passed in December 2019 but didn’t go anywhere in the Republican-controlled Senate. Mrs. Pelosi may be hoping that in an election-year crisis atmosphere the upper chamber would have no choice.
Blowing up the state and local tax deduction would reduce the tax base and increase pressure for higher tax rates. It would also make it easier for poorly governed states to rely on soaking their high earners through capital-gains and income taxes, because the federal deduction would ease the burden.
Both New York and California, for example, tax capital gains at the state income-tax rate on top of the federal rate. Those sources of revenue are the least stable, as both states are likely to discover this year when capital-gains revenue collapses due to the stock-market plunge.
Republican lawmakers have said there are no plans yet for a new relief bill. The $2.2 trillion bill passed last week aims to float the economy for weeks, and no one knows what the public-health situation will look like at the end of April. Yet it’s possible there will be pressure for more legislation to bring the economy out of its shutdown-induced coma. If Congress wants to spur growth, then cut marginal rates, which would at least increase the incentive to work and invest.
Mrs. Pelosi’s remarks underscore the potential for further political mischief and long-term damage as the government intervenes to stimulate the economy. When Democrats next complain that Republicans want to cut taxes “for the rich,” remember that Mrs. Pelosi wants to cut them too—but mainly for the progressive rich in Democratic states.
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