Senate Democrats are at an impasse on how to address the current $10,000 cap on deducting state and local taxes, leaving a meeting Tuesday without consensus on how to handle the issue in their $2.2 trillion budget reconciliation bill.
“SALT” deduction proponent Sen. Bob Menendez, D-N.J., and critic Sen. Bernie Sanders, I-Vt., have been working on a plan to extend the cap past its 2025 expiration and add an income-based exemption. But their efforts hit a snag this week over disagreement on the income level at which limits should begin, and over whether it should generate revenue to fund other priorities in the social safety net and climate package.
Menendez and Sanders held a press conference weeks ago to announce they’d be working on an income-based SALT cap as an alternative to the plan that passed the House, which would raise the cap to $80,000 beginning retroactively in the 2021 tax year and extend it until it returned to $10,000 in 2031. That would generate nearly $15 billion in revenue, in comparison to earlier proposals that would have added to the bill’s cost after pressure to trim the package from Senate centrists.
Menendez said Monday the Joint Committee on Taxation found that an income-based exemption that began phasing out at $550,000 of earnings for an individual and “a little less than double” that for married couples filing jointly would be revenue neutral. He’d previously called for a threshold around $550,000, saying it would cover nearly all New Jersey taxpayers.
Sanders told reporters he wanted the phaseout to begin at $400,000 of income, which he said Monday would raise a couple hundred billion dollars he hoped would pay for expanding Medicare benefits.
The two senators met in Senate Majority Leader Charles E. Schumer’s office Tuesday afternoon with fellow Senate Democrats including Michael Bennet of Colorado, Jon Tester of Montana, Elizabeth Warren of Massachusetts, Jeff Merkley of Oregon, Jon Ossoff of Georgia and Maine independent Angus King, most of whom have said they prefer the income-based plan to the $80,000 cap now in the bill.
Lawmakers leaving the meeting described it as productive, but bringing no final agreement on the issue.
“It was a good discussion,” Sanders said. “I think we’re making some progress.”
A Menendez spokesman called the meeting “a positive step” but said a revenue-generating approach would lose support from his boss.
“Any attempt to raise revenue from the SALT cap is a nonstarter for the senator as it doubles down on bad policy and makes New Jerseyans pay more than their fair share,” the spokesman said. “As negotiations continue, a revenue neutral proposal on SALT is the only viable path forward.”
'We're changing it'
Tester, who’s been critical of changes to the SALT cap for benefiting people earning over $400,000 per year, said after the meeting that senators discussed multiple options on SALT and that a lower deduction limit is a possibility, but some form of changes to the current bill are likely.
“I think we’re changing it,” Tester said. “We’re not using the House version.”
Senators from high-tax states like New York, New Jersey and California generally favor bigger exemptions from the SALT cap, arguing it unfairly targets their states and makes it more difficult to fund progressive policies at the local level.
But others including Sanders, Bennet and Tester have been critical of some options for benefiting the wealthy. Outside experts largely prefer the income-based exemption to lifting the cap, saying the latter would give a bigger benefit to the rich but that any change to the SALT cap would be regressive.
Another stumbling block to SALT plans could come from Sen. Joe Manchin III’s suggestions that Democrats slow down their work to pass the reconciliation bill as a whole, which could make it more difficult to begin any changes to the cap in the 2021 tax year. Schumer has set a Christmas deadline for passing the filibuster-proof package, but he’ll need support from the West Virginia centrist to do so.
Manchin told reporters Monday he still favors the “strategic pause” he called for months ago given uncertainty about inflation and COVID-19, especially given the new omicron variant. “The unknown is great right now and it gets greater,” he said. “So all these things give you cause to pause.”
If the Senate holds off on passing the reconciliation bill until 2022, that would complicate the retroactive relief.
“As long as they do it before filing season, which starts really in February, it shouldn’t really matter much to taxpayers,” said Tax Policy Center Senior Fellow Howard Gleckman in an interview. “Now what it will do is be a nightmare for the IRS.”
Gleckman said he’d still expect Democrats to move ahead with beginning SALT changes in 2021, but doing so in early 2022 would mean the IRS would face a crunch to redo tax forms and lead to more people filing taxes late. It would be a bigger challenge for the agency if the issue lingers and Democrats wait until the last minute to settle on their SALT cap plan.
“The longer they wait, the harder it is,” Gleckman said.
Sen. Benjamin L. Cardin, D-Md., who opposes the SALT cap, acknowledged that a major tax law change for 2021 would be tougher if the bill lingers into 2022.
“We’ve done it before, but it’s messy,” he said.
Adjusting the Republican-created SALT cap in a way that’s felt before the 2022 midterms would be a boon for Democrats from wealthier, high tax areas who want to run on the issue. Some Democrats flipped House districts running on in part on opposition to the SALT cap.
It’s unclear if some members — including House Democrats from New York and New Jersey who staked their support for the reconciliation bill on it including SALT cap relief — will support the plan that senators land on.
Rep. Josh Gottheimer of New Jersey said he plans to speak with Menendez following Tuesday’s meeting. He said he’ll need to see the details and impact in his district of an income-based exemption to the cap before he knows whether he can support it, but that he’s “really pleased” with what’s in the bill now.
Rep. Tom Malinowski, another New Jersey Democrat who helped negotiate the compromise in the House bill, said House members will have to remain involved in SALT talks.
“It’s got to work for me and for other members who come from SALT states that are affected by SALT, so we have to be and will be part of this conversation,” he said.
David Lerman contributed to this report.