By Ryan Ellis
House Democrats may be running on a tax platform consisting of uncapping the SALT deduction for wealthy households, increasing the tax rate on mature small businesses to the highest level seen since the 1970s, and raising taxes on large U.S. employers, as indicated by a new tax platform from a top Democratic candidate for the U.S. House.
The platform is authored by Illinois 6th Congressional district Democratic nominee Sean Casten. A detailed outline in its own right, the plan also might provide a glimmer into the tax playbook that might be used by Democrats in House races across the country this fall, at least in districts with a profile similar to Illinois-6.
The tax plan is unusually detailed, and has three basic themes:
SALT as a big issue. The Tax Cuts and Jobs Act of 2017 put in place a $10,000 limit on the previously-uncapped state and local tax (SALT) deduction. In practice, SALT before the law was limited by three big factors:
two-thirds of families elected to claim the standard deduction and did not therefore claim a SALT deduction
many of the one-third of families claiming a SALT deduction claimed less than $10,000 and the cap would not matter
five million families in the one-third were ensnared by the Alternative Minimum Tax (AMT), which did and does not allow a SALT deduction at all
Nonetheless, Democrats have seized on the SALT issue and it’s the top talking point in the Casten memo. Expect Democrats to run on it as the first talking point they make in districts like Illinois-6. This is despite the fact that the left-leaning Tax Policy Center estimates that restoring the full SALT deduction is a highly regressive change to the tax code.
According to the Tax Policy Center, nearly half the benefit from uncapping SALT would go to families making more than $1 million per year. These households would receive an average tax cut of nearly $45,000 annually. By contrast, only 7.5 percent of the SALT tax cut would go to families making less than $200,000 per year, who would receive a tax cut of between $10 and $130 annually.
All told, the SALT uncapping would benefit the top ten percent of households much more so than anyone else, and most get no benefit at all. It’s very unusual for a Democrat to run on such a regressive tax cut, especially as their top tax priority. It’s even more baffling considering the tax increases seen in the rest of the plan.
According to the TPC in a separate report, taxpayers in Casten’s Illinois are enjoying a large tax cut, even after accounting for the new SALT cap. Federal taxes in Illinois decline under the new tax law in the aggregate by 7.5 percent, and after-tax income rises in total by nearly 2 percent.
65 percent of families in Illinois receive an average tax cut of nearly $2400 in 2018, with another 29 percent seeing no net change. Only 6 percent of households see a net tax increase. Those numbers don’t change much at all with an unlimited SALT deduction on top of current law–66 percent would get a tax cut, 29 percent no change, and 5 percent a tax increase. Most of those seeing no net tax change paid no income taxes even before the tax cut.
The Tax Foundation estimates that the Tax Cuts and Jobs Act will create 14,000 jobs in Illinois and increase after-tax income for middle class families by $675 annually. That impact is larger for families with minor children, who benefit from the child tax credit doubling from $1000 to $2000 per child.
Americans for Tax Reform maintains a running list of pay increases, salary bonuses, 401(k) match increases, and utility bill cost reductions by state, including in Illinois. These are benefits that don’t show up in traditional tax cut distribution tables.
The conclusion from the data is that the SALT limit just doesn’t affect that many people–most will claim the new standard deduction of $24,000 for a married couple (half that for singles) and SALT is simply not a part of their tax equation. According to Congress’ non-partisan Joint Committee on Taxation, the number of families taking the standard deduction (and foregoing a SALT deduction at all) will rise from 67 percent to 88 percent because of the tax law.
Uncapping SALT will help very few taxpayers, and disproportionately at the top of the income spectrum–but few others. It will also make it easier for state and local governments to keep property and income taxes high, as an unlimited SALT deduction means an unlimited implicit federal tax subsidy for state and local taxes.
Small businesses face much higher tax rates. Whatever benefit might be derived from uncapping SALT would more than be clawed back by the next three planks in Casten’s memo:
Creating a new 39.6 percent top bracket for those making $1 million per year (the top rate is now 37 percent)
Eliminating the small business deduction for up to one-fifth of profits (known as the “qualifying business income” or QBI deduction)
Uncapping the Social Security wage base, which increases marginal rates by 12.4 percentage points on wage and self-employment income above $127,200
Taken together, these three proposals would be a very large tax increase, potentially far larger than the SALT deduction give-back. Their interaction could be especially negative for mature, unincorporated smaller firms like family owned manufacturers and family farms. It would also be a large tax increase for high wage earners.
So-called “pass through” or “flow through” firms pay business tax profits at the individual tax rates. So right off the bat, increasing the top rate from 37 to 39.6 percent is a tax increase on small business profits at that profit level. Sole proprietors, partners, S-corporation owners, and LLC members pay taxes at these personal rates.
But small businesses under the Tax Cuts and Jobs Act also get to deduct one-fifth of their profits, assuming they pass threshold requirements on business type and wages paid. As a result, the top effective small business tax rate under the new tax law is 29.6 percent for qualifying businesses. Increasing the small business top statutory rate to 39.6 percent and eliminating this QBI deduction is a ten percentage point increase in the effective top rate, from 29.6 to 39.6 percent.
Finally, sole proprietors, general partners/LLC members, and more than 2 percent manager/owners of S-corporations also pay either the self-employment tax or the FICA wage tax–on top of the federal income tax. Here’s how that tax would change under the Casten memo (all numbers for a single taxpayer):
Current Law Casten Memo
$0-$127,200 15.3% 15.3%
$127,201-$200,000 2.9% 15.3%
$200,000- 3.8% 16.2%
That’s a very large tax rate increase for small business owners and employees making $127,200 or more. All told, a 39.6 percent top rate and a 16.2 percent self-employment tax/FICA rate means a combined successful small business tax rate of 55.8 percent. The tax rate on mature small businesses hasn’t been that high since the Carter Administration, and would be one of the highest business tax rates levied in the developed
A small business owner from Illinois recently testified before the House Ways and Means Committee, where he reported that his 2018 business revenue (through April) already exceeded business revenue for the entirety of 2017. Congressman Roskam, Casten’s opponent in the sixth district, invited the business owner and asked what he was doing with all the extra money:
A confusing section on corporations. The most difficult section to analyze in the Casten memo is the corporate tax reform portion. Rather than call for a specifically higher corporate tax rate, Casten’s memo puts forward three ideas which were already accomplished in tax reform
First, the memo says that tax reform should have focused on full business expensing instead of lower rates. Well, tax reform did both. The corporate income tax rate–which was the highest in the developed world prior to tax reform, a global tax competitiveness disadvantage by universal attestation–was reduced to 21 percent federally (Illinois has a corporate tax rate of 28.5 percent when state corporate taxes are included, as they properly are in cross-border comparisons, still higher than the 24 percent OECD-ex-US average).
The tax law also introduced 100 percent bonus depreciation (a synonym for full expensing) in lieu of multi-year cost recovery. This is limited to five years with a phaseout over the subsequent five years, but the temporary characteristic was due to Senate budget rules, not Congressional intent.
Second, the memo calls for tax credits for jobs created in targeted fields, and for border taxes to make manufacturing exports more competitive. The Tax Cuts and Jobs Act already does that, which makes the Casten memo perplexing. There’s a type of global minimum tax (“GILTI”) to prevent corporations setting up business in tax havens like Bermuda. There’s a tax on companies shipping jobs and capital overseas (“BEAT”). There’s even a kind of export subsidy for U.S. companies selling from America to foreign countries (“FDII”). When combined with a territorial tax system, the new international tax landscape already has all the leakage protections and domestic encouragements the Casten memo calls for. It will no doubt have to be tweaked and policed by Congress, but the basic mechanics are already there.
In an interview with Forbes, Congressman Roskam went so far as to describe the Casten memo as a “unmasking” of what Congressional Democrats will be running on this year. He was particularly concerned about his constituents who owned manufacturing S-corporations: “These are third and fourth generation families who own businesses in my district, and make things. They can’t handle the kind of tax rates this memo is talking about,” continued Roskam.
After evaluating the Casten memo in full context, it should be a simple matter for Congressional Republicans to answer this type of tax increase outline. After all, if Republicans can’t defend a tax cut and oppose a tax hike, one has to wonder what they can do.