Who wins in the SALT deduction cap battle?

Annette Nellen, San Jose State University Professor and Director of the MST Program joins the Yahoo Finance Live panel to breakdown the SALT deduction cap.

Video transcript

ZACK GUZMAN: Welcome back. In this week's Tax Time, we're digging deeper into that report on a potential Biden proposal to up capital gains taxes as high as 40% for wealthier Americans here, as well as another tax battle that's brewing in the background when it comes to state and local taxes there and efforts to potentially repeal that $10,000 cap. For more on that, I want to bring on our next guest here, Annette Nellen is San Jose State University professor and director of the MST Program. She joins us now.

Annette, good to be chatting with you. I guess we'll start before we jump into SALT, start on the capital gains front. Because we saw stocks sell off on that report. What do you make of that historically when you think about increasing it for some wealthier Americans?

ANNETTE NELLEN: Well, it should be no surprise because President Biden did campaign that he would increase the rate for those making more than a million dollars to 39.6%. Plus we already had a 3.8% tax on those high income capital gains, getting it to 43.4. That is high. I mean, we had-- the highest we've had since 1986 was 28%. And so that's a high rate. But I think they're tying it to look at what the top rate is on earned income, not just capital gains.

AKIKO FUJITA: What does this mean, you think, from a revenue standpoint? I mean, kind of put this in context for us in terms of how many Americans likely to get hit. Of course, the figure, the number itself is really what's in question.

ANNETTE NELLEN: This would be less than 1% of individuals. If he keeps with his campaign promise, it would only be if you're making more than a million dollars, then you'd have a 39.6% capital gains. I mean, we don't have all the details on that. Is it only when your capital gains exceed that? But we talking about less than 1-- less than half of 1% of individuals would be seeing that.

ZACK GUZMAN: Let's talk about something that might impact a little bit more than just that subset of wealthier Americans, which, of course, would be the take on state and local taxes there. And the Trump tax reform piece of that capped it at about $10,000, the deduction there, but potentially exploring Democrats' goals to change that. So what should people know about SALT deductions and how it might impact things when it comes to taxes moving forward?

ANNETTE NELLEN: Well, that does date back to the Tax Cuts and Jobs Act under the Trump administration enacted in 2017, where, when you itemize, you can only deduct up to $10,000 of state and local taxes, whether you're single or married. And that, along with increasing the standard deduction, means that far fewer individuals itemize or claim any state tax deduction.

AKIKO FUJITA: So who is-- if there is a repeal, who is that likely to benefit the most?

ANNETTE NELLEN: Well, prior to Tax Cuts and Jobs Act, I think we forget that only 30% of individuals even itemized their deductions. So they're the only ones that even potentially get that deduction. But then we had the alternative minimum tax, which then limited that state deduction for a lot of middle income individuals who itemized. The bulk of the benefit of restoring the full state tax deduction is clearly to the top 1%. And even within that 1%, about half the benefit will go to the 10%, the top 10% of that top 1%.

AKIKO FUJITA: Annette Nellen, San Jose State University professor and director of the MST Program, it's good to get some of your insight today. Appreciate your time.