Three Tax Cuts a Santa Claus Congress Could Deliver in 2019

Congress must pass a comprehensive funding bill by the end of next week to avoid a repeat of last year’s government shutdown. Such a must-pass bill at the end of the year often becomes a “Christmas tree” decorated with various policy riders and pet projects for members of both parties in Congress. But under this year’s tree, a fiscally irresponsible Santa Claus Congress might leave wealthy Americans three gifts that together could cost up to $1 trillion over the next ten years – all put on the nation’s credit card for young Americans to pay off for generations to come.

Raising or Eliminating the SALT Deduction Cap

The Republican tax bill of 2017 was primarily a package of tax cuts for wealthy Americans that together cost the federal government roughly $2 trillion in lost revenue over 10 years. But the bill’s price tag would have been even higher had it not included one major revenue-raising provision: a $10,000-per-household cap on the state and local tax deduction (SALT). The SALT deduction allows taxpayers who itemize their federal income tax returns to exclude from their taxable income money paid to state and local governments in property taxes plus either income or sales taxes.

Many lawmakers from states where government spending and taxes tend to be higher – mostly those with Democratic governments – want to raise or repeal the cap because they believe it hurts their state’s ability to continue funding current government services. The partisan nature of the Republican tax law, as well as statements made by supporters of the law prior to its passage, also created the perception that the SALT cap was created for the express purpose of penalizing constituencies that voted for Democrats. SALT-cap opponents scored a major victory yesterday, when the House Ways and Means Committee voted in favor of a bill that would temporarily repeal the cap.

This effort is deeply misguided: even among taxpayers who were impacted by the SALT cap, the vast majority received a net tax cut from the 2017 tax bill. Repealing the cap would almost exclusively benefit the wealthiest Americans, with 96 percent of the benefits of repeal going to taxpayers in the top fifth of the income distribution and 57 percent going to those in the top 1 percent alone. Additionally, tax revenues in most states increased as a result of the 2017 tax bill rather than decreased, demonstrating the SALT cap did little to limit provision of services. SALT-cap repeal would simply give wealthy Americans who already made out like bandits from the 2017 tax bill an even greater tax cut.

Repealing the Cadillac Tax

The federal government provides a $280 billion-per-year subsidy to employer-sponsored health insurance plans by making them fully excludable from taxable income for both employers and employees. Many economists believe this provides a perverse incentive for businesses to spend more money on health care instead of increasing other forms of taxable compensation, such as wages. The Affordable Care Act attempted to tackle this problem by imposing a 40 percent excise tax on each dollar spent on employer-sponsored insurance above a certain threshold, commonly known as the Cadillac Tax.

However, the tax has yet to go into effect because Congress voted in 2015 and 2018 to delay its implementation. A bipartisan group of nearly 100 health economists and policy experts (myself included) sent Congress a letter in July opposing further efforts to undermine the Cadillac Tax without adopting an adequate replacement, but Congressional Democrats are now reportedly proposing to repeal the tax entirely in year-end negotiations.

Although some business and labor groups have framed the Cadillac Tax as a tax on the middle class, repeal would provide greater benefits to affluent Americans who are more likely to get generous health insurance through their employer. Moreover, at a time when health-care costs are rising rapidly and federal budget deficits exceed $1 trillion, it would be a mistake for policymakers to repeal the Cadillac Tax without offsetting the lost revenue or adopting more effective controls on rising health care costs.

Reviving Zombie Tax Extenders

Most Americans associate zombies with Halloween rather than Christmas, but Congress may see things differently. Policymakers in both parties are working to resurrect a package of special-interest tax breaks that have been expired for as long as two years. Not only would these provisions be renewed going forward, but there has actually been some consideration given to applying the tax cuts retroactively so that beneficiaries would receive a windfall for activities they previously undertook with no reasonable expectation of being subsidized. Back in May, a dozen organizations ranging from the Progressive Policy Institute on the left to Americans for Prosperity on the right urged Congress to kill these special interest tax provisions once and for all.

 A Lump of Coal for Congress?

Under current law, the federal government is projected to spend over $1 trillion more than it raises in revenue every single year from 2020 onward. The last thing lawmakers should be doing in this environment is making the problem worse by playing Santa with unnecessary tax cuts for the wealthy and well-connected. Such action could further feed into the perception that special interests control Washington, landing even more elected officials on voters’ naughty lists.