Democrats are short on time to act on a budget package containing much of President Joe Biden’s domestic agenda before November’s midterm elections, which could spell trouble for an issue that’s animated some tight House races before: the cap on deducting state and local taxes.
Democrats campaigning to hold onto House seats in high-tax states where the limit hits harder say voters know they’re the ones defending the deduction.
But the fate of what they can get done before the midterms lies in the 50-50 Senate, where an attempt to pass a major tax and spending package through the budget reconciliation process, which can sidestep a Senate filibuster, is seeing new life after a half-year hiatus.
“We have a chance so long as there’s a Democratic majority to use budget reconciliation to get some relief,” Rep. Tom Malinowski, D-N.J., said in an interview. “If we had a Republican Congress then there would be precisely zero chance.”
Restoring full deductibility has been a hallmark demand for several House members like Malinowski who represent districts where taxes and income are higher. Malinowski is among several that emphasized the issue and won in the 2018 midterms after Republicans created the $10,000 limit in their 2017 tax overhaul.
Other House Democrats leading opposition to the cap include New Jersey Reps. Josh Gottheimer and Mikie Sherrill, New York Rep. Tom Suozzi and California Rep. Katie Porter. All but Suozzi are part of the Democratic Congressional Campaign Committee’s “Frontline” program to defend members facing tough reelection races; Suozzi is running for New York governor.
The National Republican Congressional Committee is targeting Malinowski, Gottheimer and Porter. Malinowski is facing the toughest race of the bunch, according to Inside Elections with Nathan L. Gonzales, which rates his seat a Toss-up.
Most of the members’ message to voters on the “SALT” cap now is that they’ve shown it’s a top priority they can muscle through the House, and that the alternative, a Republican-controlled Congress, will oppose efforts to repeal or loosen the SALT cap. A fiscal 2023 policy blueprint from the conservative Republican Study Committee would throw out the SALT deduction altogether, saying its benefit goes to the wealthy and it subsidizes programs in high-tax, blue states.
Malinowski and Gottheimer each emphasized they secured inclusion of language that would temporarily boost the SALT cap to $80,000 — a level advocates said would shield most households in their districts — in the House-passed reconciliation bill.
“I got something done,” Gottheimer said. “I voted and pushed this legislation to restore SALT here. So I did my job here and haven’t stopped fighting for it.”
He pointed to other wins for his district including bringing federal tax dollars home through infrastructure funding.
Sherrill said in an interview that she’s continuing to look for ways to address SALT given a lack of Senate action. She added that people in her district are being hit with rising home prices and the cost of child care, which is more reason to deliver a bigger deduction.
“This is really a top-tier issue and something that concerns a lot of people throughout my district,” she said.
About 63 percent of New Jersey voters believe the SALT deduction should be fully restored for property taxes paid and support was similar across party lines, according to a July 2021 poll by New Jersey’s Fairleigh Dickinson University.
Suozzi said in a statement that he’ll pursue “every possible avenue to roll back this unjust cap.” A Porter spokesperson declined an interview.
‘They’re going to remember’
Other SALT proponents were more concerned by a lack of tangible change by November.
While he doesn’t expect SALT to be a top issue for voters, “they’re going to remember that they were told that their politicians were gonna be fighting for [SALT] but nothing happened,” said Rep. Bill Pascrell Jr., D-N.J., whose district is considered safely blue.
Sen. Benjamin L. Cardin, D-Md., said it might already be too late for changes to the cap to help Democrats this fall because this year’s tax season has passed. The House bill would’ve lifted the cap starting for the 2021 tax year, a boost that would have been felt when tax returns were filed earlier this year.
Each party’s House campaign arm has hinted at its SALT messaging, though there are still months to go in the campaigns.
DCCC Chairman Sean Patrick Maloney, D-N.Y., said in a statement after Tom Kean Jr. secured the GOP nomination to challenge Malinowski last week that the former state legislator is aligning himself with “MAGA Republicans” who “oppose state and local tax relief,” among their goals. Kean’s platform doesn’t mention SALT but objects to Democrats’ broader reconciliation bill and spending plans, according to his campaign website.
The NRCC hit Democrats in the fall for the prospect of failing to deliver on promises of granting the bigger tax break and infighting over SALT.
Path to passage
Like much else for Democrats’ domestic agenda, the fate of SALT largely hinges on Sen. Joe Manchin III, D-W.Va.
He’s in talks with Senate Majority Leader Charles E. Schumer, D-N.Y., about a trimmed-down reconciliation bill. What left the House as a $2.2 trillion social safety net, climate and tax package is likely to end up with a smaller price tag and fewer programs, and Manchin wants to see the measure reduce deficits overall.
Depending on how the SALT provision is written, it could actually raise revenue; under current law the cap goes away altogether after 2025, so extending even at a higher threshold would “score” as an offset. For example the House provision would cost $230 billion over five years but generate a net $14.8 billion over the full 10-year budget window.
But the initial windfall to wealthier households sparked intraparty controversy. Senate Democrats pushed back against the House-passed provision, which would deliver more than 30 percent of the tax benefit to the top 1 percent of households based on income, according to the Tax Policy Center, which is run jointly by the Urban Institute and Brookings Institution.
The most prominent objector, Sen. Bernie Sanders, I-Vt., was negotiating an income-based exemption from the cap last year with Sen. Bob Menendez, D-N.J. Those talks broke down and he’s since objected to the idea of including SALT.
“I think it’s totally absurd to be talking — at a time when working families are struggling, when we’re not able to provide child care, or their health care, or the education they need — to be talking about massive tax breaks for the wealthiest people in this country,” Sanders said last week.
SALT cap opponents argue the deduction has been around as long as the federal income tax — since 1913 — and ensures that households aren’t taxed twice on the same income. They argue allowing the full deduction ensures states have the money for more progressive policies and better hospitals, law enforcement and schools.
The effort has a key backer: Schumer, who’s pledged to undo the $10,000 cap. Ways and Means Chairman Richard E. Neal, D-Mass., and fellow House Democrats pointed to Schumer’s stance on the issue as evidence it will make it into any reconciliation package.
Meanwhile the SALT group is attempting other avenues, though all paths appear fraught.
Sherrill, Gottheimer, Malinowski, Porter and Suozzi sent a letter in May to lawmakers overseeing the Financial Services spending bill, seeking a policy rider that would block the IRS from using funds to restrict state workarounds to the SALT cap. It’s unlikely to get past Republicans.
Gottheimer, Sherrill and Suozzi sent another letter this month to the IRS and Treasury Department, asking that they reverse a decision disallowing charitable deductions for donations to local municipality and school funds offset by tax credits. States including New Jersey set up these laws to get around the SALT cap.
The $10,000 cap expires after 2025, and some Democrats now favor letting the clock run out. But others like Sherrill worry Republicans will aim to extend the limit to pay for other policy priorities, so Democrats may be short on time if the GOP wins either chamber in November.
Malinowski said reconciliation under a Democrat-controlled Congress and White House is the only way to loosen the $10,000 cap. His main concern now is whether that’s possible at all.
“It’s extremely difficult to imagine getting 60 votes in the Senate for any fix,” Malinowski said. “It means that we need to act while there’s a Democratic majority.”