Most families with children as well as taxpayers with higher six-figure incomes are the biggest California winners from the tax changes in the Biden administration’s Build Back Better plan so far.
Middle income people see a somewhat smaller tax break on average, according to an analysis from the Institute on Taxation and Economic Policy, a Washington research group, while the very rich would pay more.
The House approved the $2 trillion tax and spending plan last month this month, and the Senate is hoping to begin debating it next week.
Among the findings of the institute’s analysis:
▪ Lower income taxpayers. Many families among the lowest income 40% of Californians, those with incomes below $51,100, would get significant tax breaks, mostly because this year’s expanded child tax credit would continue next year.
▪ Wealthier taxpayers. Among taxpayers earning between $358,700 and $992,800, the average tax break would be about $10,000, thanks to a more generous state and local tax deduction.
▪ The very wealthy. The richest 1% of taxpayers, those making more than $992,800, would pay an average of $39,580 more in taxes next year.
The House bill would continue the expansion of this year’s child tax credit, up from $2,000 last year to either the $3,000 to $3,600 per child in effect this year.
Those earning more than $358,000 to $992,800, stand to gain because the House plan allows people to deduct up to $80,000 of what they pay in state and local taxes, and people in that income group tend to pay higher local taxes. The current limit is $10,000.
The higher SALT deduction is a big break for higher income taxpayers.
What does the tax plan mean to you?
Here are the institute’s findings on the overall impact of all 2022 tax changes on different California income groups:
▪ Lowest 20% (less than $29,100 income)—$1,110 savings, an average change equal to 6.6% of income.
▪ Next 20% ($29,100 to $51,700)—$930 savings, or 2.3% of income. Most of the savings in the above groups are the result of the child tax credits.
▪ Middle 20% ($51,700 to $83,200)—$810 savings, or 1.2% of income. The full child credit is phased out starting at $75,000 for single people and $150,000 for joint filers.
▪ Next 20% ($83,200 to $151,100)—$1,130 savings, or 1% of income.
▪ Next 15% ($151,000 to $358,700)—$2,980 savings, or 1.3% of income.
▪ Next 4% ($358,700 to $992,800)—$10,000 savings, or 1.9% of income.
▪ Top 1% ($992,800 and above)—$39,580 increase, or 1.2% of income.
The richest face a bigger tax bill because of the income tax rate increases. The House measure imposes a surtax on the highest incomes. The top 1% would pay an average of $67,050 more, which more than offsets the $23,180 they’d save from the SALT increase.
Why SALT matters
While some taxpayers in the $358,700-$992,800 bracket would pay somewhat higher income tax rates, and benefit less than others from a child tax credit expansion, their overall taxes would go down largely because of a SALT break averaging $10,280.
“Despite what its promoters say, raising the cap to $80,000 would provide almost no benefit for middle-income households,” said a separate analysis from the nonpartisan Tax Policy Center,.
The Institute on Taxation and Economic Policy found that those making $51,700 or less would see no new SALT benefit, while those making $51,700 to $83,200 — the middle 20% of incomes — would see a $30 average reduction because of the SALT change.
Those making $83,200 to $151,100 would see a $410 average benefit from SALT, while those making $151,100 to $358,700 would average $2,570.
The notion of providing a tax break to higher six figure income earners is troubling to some Democratic – senators and a convenient target for Republicans.
“I don’t understand why Democrats seem to be hell-bent on what will be a huge tax windfall for the wealthy,” said Rep. Kevin Brady, R-Texas, top Republican on the tax-writing House Ways and Means Committee, told Gray TV’s “Full Court Press with Greta Van Susteren.”
The effort is on among Democrats in the Senate to trim the break. Sens. Bob Menendez, D-New Jersey, and Bernie Sanders, Ind.-Vt., met this week to discuss the issue.
“The multi-millionaires and billionaires who own mansions in exclusive neighborhoods and can afford to make extremely expensive purchases do not need a tax break,” said Sanders.