Democrats Consider Tax Cuts for High-Income Earners in NJ, NY, California

High-income earners in California, New York, and New Jersey might escape tax-rate increases under Democrats’ proposed tax plan, The Wall Street Journal reported Friday.

Some residents in those and other states also could regain a deduction for state and local taxes that was capped at $10,000 four years ago, the Journal reported.

The result could be that some people who earn more than President Joe Biden’s $400,000 threshold for tax increases actually could end up with additional tax cuts.

“The combination of keeping the low tax rate and being able to fully deduct state and local taxes gives these families an even bigger benefit than even the 2017 tax writers intended,” Brian Riedl, a senior fellow at the conservative Manhattan Institute, told the Journal.

Biden on Thursday said he had secured a new $1.75 trillion framework for economic and climate change spending that could pass the Senate via reconciliation.

CNBC reported that Democrats would help pay for the package by levying a tax surcharge on those making more than $10 million a year, raising taxes for some high-income business owners, and strengthening IRS tax enforcement.

Biden insisted that households earning less than $400,000 a year wouldn’t “pay a penny more” in federal taxes and would likely get a tax cut from the proposal, CNBC said.

Democrats said they expect changes to the deduction cap to be added before a final vote, the Journal said. One option would be to repeal the cap for 2022 and 2023 and reinstate it in 2026 and 2027.

The Journal reported that repealing the cap in those first two years could outweigh all of the tax increases on high-income people, according to the Committee for a Responsible Federal Budget, which has criticized plans to remove the cap.

Sen. Kyrsten Sinema, D-Ariz., objected to the individual tax-rate increases in the House Democrats’ tax plan that would have raised the top marginal tax rate from 37% to 39.6% for taxable income above $400,000 for individuals and $450,000 for married couples, the Journal said.

That would have offset some of the benefit of changing the state and local deductions. Instead, individual tax-rate increases don’t start until income reaches $10 million under Biden’s plan.

The Journal said households in high-tax states stand to benefit from the combination of policies.

Republicans say they capped the state and local deduction at $10,000 in 2017 because it provided an unfair federal subsidy to state governments.

Many progressives oppose restoring the deduction because the bulk of the benefits go to the wealthiest Americans.

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