With the price tag of their sweeping budget reconciliation package seemingly dwindling, Democrats pushing an expensive plan to lift a cap on state and local tax deductions may find themselves in the uncomfortable position of needing to pay for that relief by keeping some limit in place for years to come.
The $10,000 cap on state and local tax, or “SALT,” deductions, imposed under the 2017 GOP-written tax overhaul, is set to expire after 2025. Democrats from high-tax states like New York, New Jersey and California want to repeal the cap, though some say they’ll settle for at least a two-year repeal through the midterm elections. However, that could still cost in the neighborhood of $170 billion by some estimates.
One option in play that could be a middle ground approach: Set the cap at a much higher level, short of full repeal, but extend it out past 2025, perhaps through the end of the decade depending on how long it would take to make it revenue neutral. There are various ways to slice it and dials to be played with, but the general idea is to make SALT relief pay for itself if necessary, without needing to come up with new and contentious offsets.
While it’s not an option the party is currently focused on, and it could face pushback from staunch supporters of full repeal, it’s on the table and could come into play if Senate moderates Joe Manchin III, D-W.Va., and Kyrsten Sinema, D-Ariz., successfully cut the reconciliation bill’s gross price tag.
Manchin has pitched taking the $3.5 trillion figure down to $1.5 trillion — and SALT relief for lightly taxed West Virginia wasn't anywhere on his list of demands.
“We’re looking at all of this right now,” House Ways and Means Chairman Richard E. Neal, D-Mass., said this week. He said the idea of paying for SALT relief by extending a cap into later years wasn't a major topic of discussion at the moment, but that it’s “part of the overall discussion for sure.”
Offsetting rate cuts
By limiting the amount paid in state and local taxes that can be deducted from federal tax bills to $10,000, Republicans raised revenue to offset costs of their tax overhaul, which cut the corporate rate and temporarily lowered the top individual income rate.
Democrats have since aimed to reverse the move, which primarily hits blue states with higher income and property taxes. New York and New Jersey lawmakers in the House have in particular railed against the cap. It hits the home states of some top Democrats hardest, including Neal, Senate Majority Leader Charles E. Schumer and Speaker Nancy Pelosi.
Proponents of getting rid of the limit have argued it helps keep wealthier taxpayers in blue states with higher rates and, thus, fund more progressive programs at the state or local level.
But getting rid of the cap entirely has run into trouble with some progressive groups and lawmakers, including Rep. Alexandria Ocasio-Cortez, D-N.Y., because much of the benefit flows to higher income levels. More than half the benefit of repealing the cap entirely would go to households making more than $1 million per year, according to a Joint Committee on Taxation estimate.
Republicans have hit hard at the plan to address the SALT cap, describing it as a move by Democrats to benefit the wealthy at the same time they are hitting them with higher taxes elsewhere.
Removing the SALT cap would “create tax havens for billionaires against the very tax hikes that they are proposing,” House Ways and Means Committee ranking member Kevin Brady, R-Texas, said in a floor speech Wednesday. “Penthouse occupants are cheering. The building janitor gets nothing.”
Now with Democrats in gridlock over the filibuster-proof budget package this week, much of Biden’s agenda hinges on whether his party can get to a deal — as does the SALT cap.
Manchin and Sinema are demanding less spending and lighter tax increases to get their critical votes, but a lower total spending number could rankle progressives, who say $3.5 trillion was already a compromise for the package’s subsidies and incentives for child care, education, paid leave, health care, clean energy and more.
SALT relief in a smaller bill could spell trouble with both groups. Manchin’s home state of West Virginia and Sinema’s of Arizona are generally among the most lightly taxed states, where residents are more likely to claim the standard deduction instead of itemized deductions like SALT. The 2017 law doubled that deduction and set it to rise with inflation, so this year individual filers can claim $12,550 and married couples filing jointly can claim $25,100.
West Virginia had the lowest percentage of households claiming SALT deductions of any state —4 percent — in 2018, the last year for which IRS data is currently available. The small portion of residents who claimed SALT deductions on average reported paying about $14,000 in state and local taxes.
Arizona was roughly in line with the national average for SALT claims in 2018, with about 10 percent of residents taking advantage of the tax break. This group paid less than $12,000 on average in state and local taxes, limiting the potential benefit from raising or repealing the $10,000 deduction cap.
Meanwhile, in New York, Connecticut, California, New Jersey and Massachusetts where taxes are higher, residents claiming the SALT deduction reported more than $22,000 on average in state and local tax payments in 2018. New Yorkers were hit the hardest, reporting over $37,000 per household, according to IRS data. Those states had above-average percentages of households claiming SALT deductions.
'No deal, no SALT'
Addressing the SALT cap is expensive. An estimate by the Tax Foundation, a right-leaning think tank, found the cost of full repeal would be about $85 billion per year.
Still, while SALT relief isn't currently in the House bill, it’s expected to be part of a final package before it’s on the House floor. As part of the fiscal 2022 budget blueprint that allows the use of budget reconciliation procedures, Democrats said there was room for $120 billion to address the cap in some fashion. That figure, however, was based on a $3.5 trillion topline.
Democrats have been discussing SALT relief and there’s a “broad understanding” it will be in the bill, said Rep. Tom Malinowski, a New Jersey Democrat who ran in 2018 in part on his opposition to the deduction cap.
“I’m calm because it’s going to be in there,” he said Wednesday. “So I think I’ve gone from ‘no SALT, no deal’ to reminding people, ‘no deal, no SALT.’”
Malinowski said different options including lifting the cap to “a very high number” and extending it through 2031 are on the table, with the overall size of the budget bill a driving factor. Democrats would find a number that allows revenue from imposing a cap for six more years to cover the cost of lifting it far higher throughout the decade.
While Malinowski said it’s not necessarily a leading option or one he prefers, he said Democrats will need to know the size of the bill and what other programs could be cut if spending is slashed to get the package through the Senate. He emphasized he wants to see the deduction fully restored for his middle-class constituents.
The idea could run into trouble with other Democrats who’ve said their support for the budget bill hinges on removing the SALT cap, and prolonging its lifespan could open them up to partisan attacks.
Sen. Bob Menendez, D-N.J., who’s said he’s open to a two-year repeal, said he didn’t think he could support leaving a cap in place for longer than it's currently scheduled. He’s also not on board with an increase in the cap.
“SALT is just a question of, it’s going to have to be dealt with in some way, and just raising the cap is not good enough,” Menendez said late last week.
Others are taking a harder line as well. New Jersey’s other senator, Democrat Cory Booker, this week said he’s pushing for full, complete repeal. “I’m looking for permanency,” Booker said.
Peter Cohn and Lindsey McPherson contributed to this report.