HEROES And CARES – A Tale Of Two Tax Provisions

Dead On Arrival

By all reports the House HEROES bill ‘‘Health and Economic Recovery Omnibus Emergency Solutions Act’ will be dead on arrival in the Senate. Kelly Erb, God bless her, read all 1,800+ pages, so you can go to her for her a stronger summary. I’m focusing on the tax provisions – two in particular.

The reason for that focus is that I think those two provisions illustrate the split between Republicans and Democrats. They also reinforce a point that Thomas Piketty makes in Capital And Ideology. Both parties represent elite interests – just different elites.

Two Provisions

The two provisions are “Limitation on excess business losses of non-corporate taxpayers restored and made permanent”, which the Joint Committee on Taxation scores as a tax increase of $246 billion and “ Elimination for 2020 and 2021 of Limitation on Deduction of State and Local Taxes” which scores as a tax decrease of $137 billion. Lets’ call them EBL (excess business losses) and SALT (state and local tax) for short. Also to keep things simple, I am assuming family of four joint returns in my hypothtetical examples.

Unlike the $413 billion in additional recovery rebates, these provisions do not affect the little people very much. EBL, by its nature, affects a very narrow group. The provision requires that net business losses in excess of $500,000 on a joint return be carried forward as a net operating loss. Unless a couple has non business income in excess of $500,000 the provision will never have any effect on them. Clearly this is a problem for a small subset of the one percent.

The SALT provision is applicable to a much larger group, many of whom don’t think of themselves as very rich. Still it is a limited group. Since the Tax Cuts and Jobs Act, the great achievement of that brief period of Republicans having both houses and the presidency, the deduction for state and local taxes has been limited to $10,000.

Think about a family of four in a state that has substantial taxes, without being in the top tier, Massachusetts for example. Our family owns a modest house paying property taxes of about $4,000. The $10,000 limitation will not affect them unless their income is well over $100,000. And even then, it might not matter thanks to the $24,400 standard deduction.

So the SALT provision is directed to a subset of the 10%. It is not a permanent change, rather it suspends the limitation for 2020 and 2021.

Tax Cuts And Jobs Act

Both SALT and EL have their origin in the Tax Cuts And Jobs Act. A big theme of the Act was that people with income from owning businesses should not have to pay as much as people with income from working. Hence the lower corporate tax rates and the 20% deduction for qualified business income. There was an interesting wrinkle with the QBI.

A lot of people who own businesses where they practice professions that require quite a bit of education, like physicians and lawyers, or even something pretty light weight like accounting don’t get the QBI benefit unless they are slackers like me who don’t earn that much money.

The tax cuts were paid for in part by the EL provision (Code Section 461(l)) which the JCT scored as a $150 billion increase. SALT scoring as a $668 billion increase more than picked up the rest of the $414 billion tab for the QBI cut leaving something to contribute to other goodies like the $1.3 trillion it cost to bring the corporate rate down to 21%.

Who Got The SALT Rubbed In?

Anecdotally, the people hit hard by the SALT provision are high earners in high tax states. And to rub salt in the SALT wound if they were lawyers or physicians or the sort of accountants who make the big bucks because they are better at sales or politics than accounting, they don’t get the QBI break.

Merchant Elite And Brahmin Elite

Here is where Piketty and Capital and Ideology come into the picture. One of his observations is that back in the day (the fifties), the parties that were identified either left or right (In the US that has been Democrats versus Republicans. It is more complicated in Germany, France and the UK) divided along class lines.

So the people leaning toward the left party would tend to have lower income, wealth and less education. The people leaning right would have more of all of the above. That has changed as Piketty explains in this paper.

Since the 1970s-1980s, “left-wing” vote has gradually become associated with higher education voters, giving rise to what I propose to label a “multiple-elite” party system in the 2000s-2010s: high-education elites now vote for the “left”, while high-income/high-wealth elites still vote for the “right” (though less and less so).

I.e. the “left” has become the party of the intellectual elite (Brahmin left), while the “right” can be viewed as the party of the business elite (Merchant right).

Of course some of the highly educated make pretty good income and were really hurt by the SALT provision of TCJA and likely not helped by QBI.

There’s A Pandemic – Let’s Cut Taxes

Along comes the COVID-19 crisis and the CARES Act has as the second largest tax break a temporary undoing of EBL. That was clearly the work of the party of the Merchant right doing penance for the small group thrown under the bus as part of the TCJA.

The Joint Committee ultimately scored that at $135 billion. The thing is hardly anybody understood Code Section 461(l) and the bill was voted on before it was scored, so that was something of a stealth move.

Now we have the HEROES Act crafted by the party of the Brahmin left. It strikes with vengeance at the stealth move not only undoing the suspension of EBL, but making it permanent which scores as a $246 billion tax increase.

But then it takes care of its own. The SALT provision is suspended for two years which is a tax cut of $137 billion.

The Merits

I have to say that I agree with my blogging buddy Joe Kristan that 461(l) was probably a bad idea. Eliminating the SALT deduction probably had some merit.

Regardless of that there is no justification for playing with these provisions under the guise of COVID-19 relief. By their nature the suspensions are a boon to people who probably need it less than most.

I think though that they are good evidence of Piketty’s observation on the parties serving the needs of competing elites.

For what it is worth Capital And Ideology is a long haul and I am currently on the home stretch. There has been a lot of criticism of it and I found a few nits I would pick with some of this observations on US income tax law, but the broad historical theory of various types of inequality regimes justifying themselves is pretty compelling.