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Michael Cianchette is a Navy reservist who served in Afghanistan. He is in-house counsel to a number of businesses in southern Maine and was a chief counsel to former Gov. Paul LePage.
It’s fun to watch congressional Democrats scramble to enact tax cuts for the rich.
That’s a catchy lede, right? It isn’t totally fair; as always, reality is a bit more nuanced.
The same holds true on Pennsylvania Avenue; President Joe Biden’s tax plans are soaking up all the headlines. Eliminating the preference for long-term capital gains — raising the rate from 20 percent to 39.6 percent — is the big story.
Since I am one of the right-leaning columnists for this august newspaper, you’d probably think I oppose the president’s efforts. Fair guess?
Reality is a bit more nuanced.
Taxing capital gain income the same way we tax “ordinary” income — small business profits, wages, gig work — makes a lot of sense. In fact, that was one of the major pieces of President Ronald Reagan’s 1986 tax reform. The top marginal rate — for ordinary income and capital gains alike — was pegged at 28 percent.
Joe Biden supported it.
Capital gains received a tax preference again in 1991, when President George H.W. Bush broke his “no new taxes” pledge and agreed to bump the top ordinary income tax rate to 31 percent.
Bush then lost the White House to Bill Clinton, who — with only Democrat votes — pushed that top rate to 39.6 percent. Dozens of Democrats joined Republicans to oppose Clinton, but it was too late; the damage was done and the GOP won control of Congress in the midterm elections.
Then-Sen. Biden had a front-row seat to the electoral disaster, having voted “yea” on Clinton’s tax hike. Two years later, he came out in support of a constitutional balanced budget amendment.
President Biden might’ve forgotten this lesson, but other Democrats haven’t.
Tax hikes are never popular, which make them politically dangerous for the threadbare majority led by Speaker Nancy Pelosi and Sen. Chuck Schumer. Couple that with historic precedent where the party that controls the White House normally loses in the midterm election, and, well, you have the makings of a Republican comeback in Washington.
To help stave this off, some Democrats are fighting for an undercover tax cut for the rich. Taxes which Republicans raised under President Donald Trump.
Before the Tax Cuts and Jobs Act of 2017 was enacted, taxpayers had a choice. A single person could take the standard deduction of $6,350, or they could itemize their deductible expenses to write down their income subject to federal tax. One of the biggest expenses that could be itemized was payment of State And Local Taxes. SALT.
After the GOP-led 2017 reform, taxpayers faced a changed choice. The standard deduction was greatly increased, capturing a lot more expenses and hopefully making tax time simpler for many Americans. Those with more deductions — and more income — could still itemize. But their SALT deduction was limited to $10,000.
On the margin, those who paid more under this tax regime were higher income people living in states with heavier tax burdens. Like California and New York. And Maine.
Some Democrats are working to remove the cap on SALT deductions. Which, practically, is a tax cut for many people with higher incomes. It’s a bad idea.
The beauty of our federal system is that the states have great latitude to manage their own affairs. We’ve seen it with COVID-19; the pandemic was managed differently in each state, with different results for community spread, mental health, economic viability, and the like. The retrospective will be both fascinating and informative for whenever the next crisis inevitably arises.
That same beauty exists with tax policy. States can make different policy choices, people and businesses can react accordingly, and we can see the outcome. But when Washington puts its thumb on the scale — cutting federal taxes for those who pay more state taxes — we lose some of that local freedom.
So I support — in theory — Biden’s efforts to equalize taxes between ordinary income and capital gains, even if I think his chosen rates are out of whack. I’ll oppose Democrats’ attempts to give tax cuts to high-income earners by removing the SALT cap, even if it means Mainers with higher incomes will pay more in taxes.
Reality always has a bit of nuance.