By: Ryan Ellis
Last week, Congressional Democrats released a detailed tax hike plan they will be running on this fall in the midterms.
What’s most striking about the plan, besides the specificity not usually seen in such agendas, is that if the plan became law it would hit blue states and cities much harder than red/Trump states and areas. This is true for several reasons:
The Democratic tax hike plan restores the AMT yet leaves the SALT cap in place. The Tax Cuts and Jobs Act law all but eliminated the alternative minimum tax (AMT) for 4.4 million families. These tax households–mostly six figure mass affluent types living in expensive blue cities and suburbs–used to have to calculate their taxes two ways, and pay the higher (that is, AMT) figure. One of the things they had to do in that calculation was disallow their state and local tax (SALT) deduction. So by being in the AMT, they got no SALT deduction at all.
The new tax law restores the SALT deduction for these families, but caps it at $10,000.
The Democratic plan is the worst of all worlds for these taxpayers: their SALT deduction is still capped at $10,000 (if they somehow remain in the regular tax system) and the AMT is fully restored (wiping out their SALT if they are in the AMT system). Either way, they are probably worse off than today.
There is no doubt that a former AMT taxpaying family from a blue area would rather be under the new tax law than under the Democratic tax plan.
We’re already starting to see some blue states chafing under the SALT cap. Imagine what they will do if they have to labor under the SALT cap and a fully restored AMT.
This from New Jersey (280,000 million formerly AMT families), in response to Governor Phil Murphy’s (D) plan to increase income taxes on millionaires:
Senate President Steve Sweeney, a Democrat, said he is concerned that a millionaires tax would be too much in addition to the new federal tax law, which capped previously unlimited annual state and local tax deductions at $10,000 for individual and married filers. Mr. Sweeney previously sponsored several bills that would have raised income taxes on New Jersey residents earning more than $1 million, all of which were blocked by former Republican Gov. Chris Christie.
“We’re going to jack up people’s taxes and they can’t write it off?” Mr. Sweeney asked. “The game changed when Washington passed this so-called tax cut.”
What about states like New York (514,000 formerly AMT families) and California, (901,000 formerly AMT families) each of which are coming up with Rube Goldberg tax plans to get around the SALT cap’s effects on their states’ ability to hide the true size of their tax burdens? How will those states respond to a system with a SALT cap and 4.4 million more people nationwide in the SALT-less AMT?
The Democratic tax hike plan increases the top rate from 37 percent to 39.6 percent, but most top bracket taxpayers live in blue states.
According to the IRS, 960,000 families earned more than $500,000 in 2015 (this is a pretty good proxy for top income bracket taxpayers).
212,000 (22 percent) live in California
126,000 (13.1 percent) live in New York
61,000 (6.3 percent) live in New Jersey
59,000 (6.1 percent) live in Illinois, likely meaning Chicago
30,000 (3.1 percent) live in Connecticut
Those five states–California, New York, New Jersey, Illinois/Chicago, and Connecticut–contain a majority of the households whose marginal income falls into the top tax bracket. Needless to say, those are all deep blue states (Illinois less so, but as I said we’re probably mostly talking Chicago there). Raising the top marginal tax rate is a direct tax increase on the Democrats’ own voters.
Of course, it’s not just high personal income that’s included there. 30 million sole proprietors, partners, Subchapter-S corporation shareholders, and LLC members pay business taxes on their 1040s. Much of that income (all of it for more mature non-corporate firms) falls in the top tax bracket. Raising the top tax bracket rate means raising the small business tax rate, too.
The Democratic tax hike plan restores the death tax for millions of families and businesses in blue states.
Here again the IRS proves helpful. The number of estate (death) tax returns filed declined from 38,000 in 2007 to 12,411 in 2016. This is due to the large increase in the death tax “standard deduction” from $2 million to $5.5 million over that time.
Congress in the latest tax cut again increased the death tax “standard deduction” from $5.5 million to $11 million. We should expect the number of death tax returns to again drop precipitously, perhaps into the four figures (a very good argument for simply repealing the death tax, by the way). Millions more family businesses, of course, will have to dump a ton of dead weight loss money into estate planners, actuaries, lawyers, insurance agents, and accountants to avoid filing a death tax at all, but that’s a different story.
The Democrats want to cut the death tax “standard deduction” from $11 million back down to $5.5 million. According to the IRS, that will have the biggest impact on:
California (2500 returns, 20 percent of all death tax returns)
Florida (1500 returns, 12 percent of all death tax returns)
New York (1100 returns, 9 percent of all death tax returns)
Texas (750 returns, 6 percent of all death tax returns)
Illinois (600 returns, 5 percent of all death tax returns)
Those five states comprise a majority of all death tax return filing. Only ruby red Texas is clearly not a blue state, and Florida is a purple state with many trending blue areas. The Democratic plan to hike the death tax by cutting the standard deduction in half is again a tax plank aimed squarely at blue America.
On each of the major legs of the Democratic tax hike three legged stool–restoring the AMT while retaining the SALT cap, raising the top tax rate on families and small businesses, and cutting the death tax standard deduction in half–the design if not the intent seems to be targeting their own voters.
Read more here.