To whoever signed off on yesterday’s Wall Street Journal editorial attacking the ability of Main Street businesses to deduct their SALT payments – just like C corporations do – S-Corp has a bridge to sell you. Seriously, you got played.
The piece starts off wrong and gets worse from there. Here’s what it says:
Senate Republicans appear to be acquiescing to demands by House Republicans from high-tax states to raise the $10,000 limit on the state-and-local tax deduction to $40,000. In return for this gift to spendthrift progressive states, they should at least close a giant loophole in the cap.
The $10,000 cap on the state-and-local tax deduction was one of the 2017 GOP tax reform’s main achievements. But the dirty little secret is that many wealthy denizens of high-tax states aren’t affected since three dozen states have created a loophole for owners of and partners in pass-through business entities.
So the 36 states that have enacted our SALT Parity bills – including Alabama, Georgia, Louisianna, Oklahoma, Utah, Montana, Idaho, North Carolina, Nebraska – are all “spendthrift progressive” states? Tell Georgia Governor Brian Kemp, who signed the Georgia SALT Parity bill, to his face that he’s just the same as “Gavin Newsom and J.B. Pritzker.”
And the millions of pass-through business owners in those states – including manufacturers, retailers, home builders, and more – are just “wealthy denizens”? What a joke. A reader without any history here would think only “partners in law and accounting firms, hedge funds, consulting shops and physician practices “are able to deduct their business SALT,” but those businesses reflect a tiny minority of the pass-through community.
The comparison to wage earners is deeply flawed, too. SALT Parity critics often argue the policy is unfair to non-business owners, but they never back it up with any numbers. It’s true SALT Parity allows business owners to deduct their SALT – just like C corporations – but wage earners get benefits too, including tax-free retirement and health benefits, employer-paid FICA, and other advantages over the typical business owner.
The correct comparison for SALT Parity is with the corporate competition, who under the Senate bill continue to deduct all their SALT with no limitation and pay a really low, 21-percent tax rate. So Home Depot deducts its SALT, but not the hardware store around the block. CVS gets a full SALT deduction, but not your local pharmacy. It didn’t make sense in 2017, and it doesn’t make sense now. The WSJ is silent on this issue.
What they do care about, apparently, is the possibility of using the SALT Parity laws to game the system and generate federal tax deductions in excess of what the owners would otherwise pay and then use tax credits to make the taxpayer whole. While some states like Massachusetts are guilty of some version of this, the problem is wildly overstated and ignores simple fixes that would prevent gaming from taking place.
For example, the piece cites the Wisconsin Salt Parity law as a problem:
In Wisconsin, pass-throughs pay a flat 7.9% tax rate, which is higher than the state’s top marginal rate of 7.65%. Though individuals may pay more in state tax because of the workaround, they are still better off because they can fully deduct their SALT bills.
We wrote the Wisconsin law and the 7.9 percent rate had nothing to do with generating excess deductions – the state had an existing election where pass-throughs could pay at the entity level. We simply piggy-backed Wisconsin’s SALT Parity election on an existing Wisconsin provision, which meant the business would have to pay at the corporate rate – 7.9 percent. Question to the WSJ – why is a Wisconsin C corporation able to fully deduct their 7.9 percent tax, but if a pass-though does it, it’s a threat to democracy?
The entire editorial is in a similar vein, full of half-truths and massive distortions. We knew the Corporate Industrial Tax Complex has little sympathy for Main Street businesses and really hates our SALT Parity campaign, but seeing them manipulate the WSJ into publishing this ridiculous editorial is very disappointing.