SALT stays: Limit on deduction for state and local taxes isn’t going anywhere
Republicans don't want to tinker with tax reform, and Democrats don't want to be seen giving the wealthy a break.
Politicians from New York, New Jersey and other high-tax states may be making a lot of noise, but the new $10,000 cap on deductions for state and local taxes, or SALT, isn’t going anywhere any time soon.
Some 30 Democratic members of Congress, joined by one Republican, last month introduced a bill that would eliminate the cap on SALT deductions introduced in the 2017 tax overhaul. And New York Gov. Andrew Cuomo formed a coalition of Democratic counterparts from high-tax states to push for a change.
Yet their efforts are likely futile, lobbyists and tax policy experts say.
The problem: Republicans have no desire to tinker with the signature legislative achievement of the Trump administration. And many Democrats don’t want to eliminate the cap, which would be seen as a massive tax break for the wealthy, at a time when the progressive left is gaining popularity.
“Simply lifting the cap with no other reforms is just an additional windfall for high-income taxpayers on top of the other cuts” from the GOP tax law, said Seth Hanlon, a senior fellow at the left-leaning Center for American Progress, who helped devise tax policy for President Barack Obama.
The Tax Cuts and Jobs Act gave a large tax cut to corporations and wealthy taxpayers. It also limited to $10,000 the amount households could deduct for property taxes and state and local income taxes, a measure that hits residents of high-tax — and Democratic — states like New York, New Jersey, Connecticut and California harder than others. The change rankled Democratic lawmakers who saw it as a deliberate political assault.
A Treasury Department analysis released last week concluded that about 10.9 million filers had to cap their deductions for state and local taxes, paying an extra $323 billion in taxes. Other provisions in the law benefited filers, and many of those 10.9 million likely received a net tax cut.
(More: Limited deduction rubs SALT into taxpayers’ wounds)
Thirty of the 40 current co-sponsors on House version of the bill released in February, dubbed the “Stop the Attack on Local Taxpayers” (or “SALT”) Act, are from New York, New Jersey or California. The bill would try to offset the cost of repealing the SALT cap by reintroducing the 39.6% marginal tax bracket, which the 2017 law eliminated.
Rep. John Larson, a Connecticut Democrat who co-sponsored the bill, said he expects that the House Ways and Means Committee to consider adjustments to the SALT cap, but that movement would be slow.
Senate Finance Chairman Chuck Grassley, a Republican from Iowa where taxes are lower, quickly declared any effort to repeal the cap was futile.
Some governors are taking a stab at change. Mr. Cuomo, along with seven other Democratic governors, banded together to pressure House Speaker Nancy Pelosi to bring up legislation repealing the SALT cap.
Mr. Cuomo met with President Donald J. Trump in February and quoted Mr. Trump as saying he was open to discussing a SALT change, but received no assurances from the White House.
Yet Republicans like Mr. Grassley aren’t the only problem. Within a Democratic Party that’s embracing proposals to tax the rich, the math behind a SALT cap repeal is unforgiving.
More than a quarter of the benefit in repealing the SALT cap would go to the top 0.1% of income earners, according to an analysis by the Urban-Brookings Tax Policy Center. Nearly 57% of the benefit would go to the top 1% — households making $755,000 or more.
“Many members of our caucus need to see the distribution tables on complete repeal of SALT and who it impacts,” said Wisconsin Democratic Rep. Ron Kind.
Mr. Kind, who is part of the tax-law-writing Ways and Means committee, said that would be eye-opening for the members.
Without universal support for a full repeal, lawmakers could settle for more modest adjustments.
Andrew Grossman, chief tax counsel for Ways and Means Democrats, has said that the tax-writing panel is trying to figure out how to adjust the SALT cap to provide relief to filers in high-tax states without entirely repealing the new limit — a move that could make the change easier to pass.
One option, according to lobbyists, is to double the SALT deduction cap to $20,000, either for all filers or for married taxpayers, who currently are treated the same as single filers.
Without major adjustments to other parts of the tax law, a Democratic repeal of the cap would look like a giveaway to the wealthy, said Don Snyder, a tax lobbyist with the Federal Policy Group.
“I can’t see how they do it,” Mr. Snyder said. “It was a central piece of the law as a revenue raiser, and it’s definitely not a progressive thing to do.”
(More: Wealthy individuals trying to escape SALT cap meet resistance from high-tax states)
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