Democrats’ demands for changes to the tax code are threatening to complicate efforts to pass a slimmed-down budget reconciliation package by the August recess, as warring positions on a deduction for state and local taxes reemerge as a potential roadblock.
A handful of House Democrats from high-tax states — New Jersey and New York — are still demanding that relief from a $10,000 cap on deductions for state and local taxes be included if they are going to vote for the revised budget measure.
But the Senate’s pivotal negotiator, West Virginia Democrat Joe Manchin III, doesn’t appear on board. “SALT has not been in the talks at all, no talks I’ve been in,” Manchin said Wednesday.
Manchin opposed the $2.2 trillion House-passed reconciliation bill that would have raised the SALT cap to $80,000 and has been negotiating with Senate Majority Leader Charles E. Schumer, D-N.Y., on a much smaller measure. Their negotiations have focused on a package that would raise roughly $1 trillion in revenue, with half to offset spending initiatives on climate and potentially health care and the other half for deficit reduction.
Although Schumer personally wants to lift the SALT cap given high taxes in his home state of New York, Manchin has always been cool to the idea.
But some House members aren’t giving up the fight. If the reconciliation bill is going to reverse some of the 2017 GOP tax law, Rep. Mikie Sherrill, D-N.J., said, “then you're going to have to address SALT because that's part of that.”
For her and other New Jersey members, providing relief from the SALT cap is key to protecting their constituents — many of whom are upper-middle class — from the tax increases in the bill, particularly with inflation hitting a new 40-year high in June.
“I want to see out of that bill, whatever they're considering, prices go down for constituents in my district,” Sherrill said. “If SALT brings taxes down overall, given everything else they’re passing, then that would be something I would be interested in.”
Rep. Tom Suozzi, D-N.Y., also said he won’t support any changes to the tax code if relief from the SALT cap isn’t among them, calling the limit on the deduction “one of the biggest mistakes made in the previous administration.”
“I’ll consider anything anybody wants to do, but no SALT, no deal,” he said.
The House bill would have raised the SALT cap to $80,000 through 2030, with the cap returning briefly to $10,000 in 2031 before expiring. The Joint Committee on Taxation scored that provision as a revenue raiser, $14.8 billion over 10 years, because the current law $10,000 cap is set to expire in 2025.
After several senators raised concerns about that provision, Sen. Bob Menendez, D-N.J., and Senate Budget Chairman Bernie Sanders, I-Vt., tried to negotiate a compromise setting an income threshold above which SALT deductions would be capped.
They could never agree on the appropriate threshold, with Sanders unwilling to go above $400,000 and Menendez saying it needed to be somewhat higher to protect more of his constituents. Sanders ultimately lost interest in the compromise altogether and the talks fell apart long before the latest Schumer-Manchin negotiations.
Still, Ways and Means Chairman Richard E. Neal, D-Mass., said he’s confident a reconciliation package will get done before the August recess, adding he’s gone “back and forth” with Speaker Nancy Pelosi, D-Calif., about it four or five times over the last few days.
Senate Finance Chair Ron Wyden, D-Ore., also dismissed SALT as an obstacle to getting a bill done.
“If we pass the kind of package we're talking about, which is holding down health care costs for consumers, holding down energy costs for consumers, reducing debt so that consumers can get breaks on their credit card debt or mortgages and the like, I believe that the House is going to accept that,” he said.
Manchin’s biggest concern in the reconciliation talks has been inflation, and with the latest numbers out Wednesday he reiterated that his primary goal is to ensure any policy changes he agrees to don’t drive prices up further.
Inflation climbed 9.1 percent over the 12 months ending in June, according to the latest consumer price index data. The largest contributors were rising costs for gas, shelter and food. That marks the largest 12-month rise in the index since 1981.
Manchin said those figures aren’t driving him away from the bargaining table.
“I’m just more cautious now,” he said. “I was talking about inflation before it was even thought about. And now I’m more concerned than ever before. . . . We just have to make sure we don’t inflame it.”
Republicans keep hitting at the issue, arguing Democrats’ plan to pass even a slimmed-down version of their tax and spending package will further stoke inflation.
“There is nothing slim about these tax hikes,” Senate Finance ranking member Michael D. Crapo, R-Idaho, said at a press conference Wednesday with other GOP panel members.
Manchin said the entire package “needs to be scrubbed much better” to ensure nothing in it would be inflationary.
Republicans have argued that expanding a 3.8 percent net investment income tax to active business income — which Manchin and Schumer have agreed to as a way to funnel revenue into the Medicare trust fund, extending its solvency by three years — would fuel inflation. The tax would apply to individual income earned from pass-through businesses including partnerships, S corporations and limited liability companies.
“An expanded [net investment income tax] will drive down small-business investment, drive down employment and reduce small-business hiring, lower wages in small-business communities and increase prices, which are then passed on to consumers,” Crapo said.
Asked about those Republican arguments, Manchin said, “That’s very concerning right now.”
“The only thing I’m doing, I’m looking at anything that can basically make the [tax] system fair,” he added. “I’m not looking at penalizing anybody. I don’t think we should be raising taxes. But the bottom line is there’s loopholes that can be closed.”
Asked to clarify his position on the 3.8 percent investment tax expansion, Manchin said, “We’ve been scrubbing that and there’s a little bit more scrubbing to do.”
Whatever tax provisions Democrats decide to put in the bill are expected to pass the Senate parliamentarian’s review of the package to ensure they comply with the Byrd rule that governs reconciliation measures, which can pass with just a simple majority. Items that don’t pass the Byrd test can be removed on the Senate floor unless backers have 60 votes to keep the provision.
Republicans, however, are planning to mount challenges to other provisions, like ones Democrats have agreed to on prescription drugs. Democrats submitted the prescription drug section, which would allow Medicare to negotiate with pharmaceutical companies to lower prices on a finite list of drugs and cap out-of-pocket expenses at $2,000, to the parliamentarian last week.
Democrats are also hoping to extend more generous health insurance subsidies that are set to expire at the end of the year, ideally before premium notices go out in August and September. Manchin on Wednesday continued to leave the door open to including the subsidies if they aren’t found to be inflationary, but was noncommittal.
“We know what we can pass is basically the drug pricing on Medicare. We know that one,” he said. “Is there any more we can do? I don't know.”
Democrats were expected to submit the Medicare trust fund language to the parliamentarian this week but it’s not clear if that’s occurred yet. The chief potential obstacle is that transferring money from the new business tax to the trust fund wouldn’t have any net effect on the federal budget, making that aspect of the plan vulnerable to a Byrd challenge.
A GOP Senate aide said Democrats have only given Republicans text on their drug pricing proposal and they are not sure if Democrats have shared any other text with the parliamentarian at this point.
Republicans will get to walk through the text with the parliamentarian, but they’ve not done that yet for the drug pricing language, the aide said. Nor have they begun the bipartisan “Byrd bath” in which both parties get to present their arguments to the parliamentarian about whether provisions adhere to the Byrd rule.
Paul M. Krawzak contributed to this report.