Nancy Pelosi’s claims on middle-income taxpayers and state and local tax deductions
“This is striking: 50% of households that claim State & Local Tax deduction make under $100K — & now @SpeakerRyan wants to throw it away.”
— House Minority Leader Nancy Pelosi (D-Calif.), in a tweet, Oct. 12, 2017
With House passage of a budget blueprint on Oct. 26 that could open the door to $1.5 trillion in deficit-financed tax cuts over 10 years, congressional Republicans presumably will soon unveil details of how they plan to reshape the tax code. One item high on the list: repealing the deduction for state and local taxes, known in the tax trade as the SALT deduction.
We’ve written a primer on this deduction, exploring the dubious claim about whether red low-tax states are subsidizing blue high-tax states. This tweet by Pelosi has been sitting in our inbox for a while, after a reader expressed concern about it.
Pelosi, at a news conference before the House vote, asserted the pending tax bill was “an assault on the middle class, an assault on state and local tax deductions. And I bring this up because it affects everyone.” She ticked off the average deduction for some individual states, such as: “If you live in Virginia, same thing, a million and a half people are affected. … If you live in Virginia, the average deduction is over $11,000.”
Let’s explore Pelosi’s spin.
Every taxpayer has a choice of taking either a standard deduction or to itemize deductions, which in addition to state and local (and property) taxes can include mortgage payments, charitable contributions and medical expenses above a certain threshold. For most people, especially those who do not own their homes, the standard deduction is larger than itemized deductions — and the Trump administration proposes to boost the standard deduction (but eliminate personal and dependent exemptions).
Currently, about 30 percent of tax filers opt for the itemized deduction — and virtually all of them take the SALT deduction, according to the Tax Policy Center.
Pelosi frames the SALT deduction as a middle-class tax break. But it’s really wealthier Americans who benefit. With itemized deductions, the value of the deduction increases as you move into a higher tax bracket. So $1,000 in deductions would be worth almost $400 to someone in the highest tax bracket but only $250 for a taxpayer in the 25 percent tax bracket.
In justifying her figure that 50 percent of American who claimed the SALT deduction make less than $100,000, her staff pointed to a table in a reportproduced by the Government Finance Officers Association arguing for keeping the deduction intact. The table, which is based on 2015 Statistics of Income (SOI) data from the IRS, is reproduced below. You can see that 53 percent of the people claiming the deduction make less than $100,000.
But that’s not the whole story. Look at the last column, which shows the percentage of the deduction received by various income levels. Taxpayers making less than $100,000 may comprise 53 percent of the tax filers, but they get less than 25 percent of the deductions. Tax filers making more than $100,000 get more than 75 percent.
As we have explained before (see the video above), most taxes are paid by the wealthiest Americans, so it follows that most of the benefits of tax deductions would also flow to wealthy Americans.
There is another table in the report that demonstrates this. This shows how huge the average SALT deduction is for people making more than $500,000 — and how much their taxes would increase if the deduction were repealed.
This brings us to Pelosi’s statement about the average deduction in various states. We highlighted her comment about Virginia — an average of above $11,000. The problem with an average is that it gets inflated by the big numbers for a few people. We’d rather use a median, though it’s difficult to calculate precisely and we could not find an expert who had done so. However, the Tax Policy Center does produce a state-by-state breakdown of income ranges.
When you calculate the average deduction for taxpayers with adjusted gross income (AGI) below $100,000 — who were highlighted in Pelosi’s tweet — that’s an average tax deduction of about $5,000.
That’s much less than the average she touted at her news conference. Indeed, the administration argues that many people in the lower tax brackets will abandon itemizing tax deductions because the increased standard deduction will make up for it.
Meanwhile, the average tax deduction for Virginians with an AGI above $100,000 is nearly $18,000.
This chart by the Committee for a Responsible Budget, drawn from 2013 Congressional Budget Office data, demonstrates how the benefits of the SALT deduction are tilted toward the wealthy. The top 20 percent is roughly tax filers making above $100,000, though it varies according to household size.
“There are millions and millions of hard-working households across America that are at risk of losing a deduction that is a really big deal in terms of their family budget,” said Henry Connelly, a Pelosi spokesman. “Eliminating the state and local tax deduction has very serious consequences that create very serious pain in the lives of millions of American families. Dismissing the consequences that will be felt by the majority of families who have come to rely on this tax deduction does a disservice to the debate.”
The Pinocchio Test
This is a good example of how tax data can be manipulated. Pelosi is usually eager to point out that wealthy Americans will mostly benefit from broad-based tax cuts. In this case, wealthier Americans would mainly feel the effects of a broad-based elimination of a tax break.
But in this case, Pelosi chooses to ignore the distributional tables and instead focus on the absolute number of people affected, even if the impact is mostly felt by the rich. She earns two Pinocchios.