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The latest efforts to restore a federal break for state and local tax payments come as the White House proposes tax policy changes to help fund President Biden's infrastructure package.
The battle over a $10,000 cap on the federal tax deduction that people can claim for certain state and local taxes they pay is heating up again, with seven Democratic governors calling on President Biden to support repealing the restriction.
The plea from the governors last week comes as the White House and Democrats in Congress are looking at possible changes to federal tax policy in conjunction with a roughly $2 trillion package focused on infrastructure upgrades and other domestic priorities that Biden has proposed. Three House Democrats have also come out saying they’d oppose any efforts to alter the tax code unless the so-called “SALT” deduction is fully restored.
So far, the Biden administration has not shown much eagerness for scrapping the cap, which generally benefits wealthier taxpayers, rather than those lower on the income ladder.
Congressional Republicans restricted the deduction as part of their sweeping 2017 overhaul of the federal code, which former President Donald Trump signed into law at the end of that year. Prior to 2018, there was no dollar amount limit on the federal deduction individual taxpayers could claim on certain combinations of state and local property, income or sales taxes.
Local government groups and some state officials unsuccessfully fought the cap on the deduction. They’ve generally argued it would make it harder for their jurisdictions to levy taxes used to pay for projects and services. The thinking goes that if taxpayers can’t deduct state and local taxes, they feel the financial effects of higher rates and increases more acutely.
Critics also say that imposing federal taxes on income that people use to pay state and local taxes amounts to double taxation.
In the years since the federal tax law went into effect, some states have tried to offer workarounds to the cap, several states also challenged the provision in court. Elected leaders, meanwhile, including Democratic governors and some members of Congress, have been vocal in calling for the cap to be rolled back.
“Capping SALT deductions was based on politics, not logic or good government. This assault disproportionately targeted Democratic-run states,” the seven governors wrote in a letter sent to Biden on Friday. They make clear that their preference is to “eliminate the SALT cap entirely.”
Governors signing the letter were: Andrew Cuomo, of New York; Phil Murphy, of New Jersey; Gavin Newsom, of California; Ned Lamont, of Connecticut; David Ige, of Hawaii; J.B. Pritzker, of Illinois; and Kate Brown, of Oregon.
Republicans have pounced repeatedly, criticizing Democratic efforts to repeal the SALT deduction limit. They counter that reversing the policy would mainly provide tax relief to the rich and especially to taxpayers in “blue” Democratic-leaning states with higher taxes. GOP lawmakers also say nixing the cap would make it easier for states and localities to raise taxes.
Restricting the deduction to $10,000 was one way that Republicans boosted the amount of tax dollars the federal government was projected to collect in the years after their tax law went into effect. This helped to offset the expected losses in federal tax revenue from substantial cuts to the corporate tax rate and other changes that were included in the 2017 tax package.
If the cap on the deduction were eliminated for 2021, allowing people to claim it again in full, federal revenue would fall by about $88.7 billion for the fiscal year, according to December 2019 estimates from Congress’ nonpartisan Joint Committee on Taxation.
Asked last week about Biden’s position on the cap, White House press secretary Jen Psaki noted that undoing the policy would carry a cost for the federal budget. “If Democrats want to propose a way to eliminate SALT,” she said, “and they want to propose a way to pay for it, and they want to put that forward, we're happy to hear their ideas.”
Axios reported that “a commonly held view at the senior level of the Biden administration” is that the SALT deduction cap is actually a good policy.
A 2018 Tax Policy Center analysis found that only about 9% of households would benefit from repealing the cap. Meanwhile, more than 96% of the tax cut would go to the highest-income 20% of households and the top 1% of households, making $755,000 and up, would see about half of the tax relief.
One way to view the SALT deduction is as a federal subsidy for state and local government spending that is worth more in states with higher taxes.
But Cuomo and others point to research that shows households and businesses from states where elected leaders are pushing back against the cap—like New York, Connecticut and New Jersey—send more to the federal government in tax payments than they get back in federal expenditures, and effectively provide a subsidy in that way to states with lower taxes.
The White House has proposed a number of tax policy changes related to the infrastructure package that Biden has put forward. Notably, the plan calls for raising the top corporate income tax rate to 28% from 21%—it had been 35% before it was slashed under the 2017 tax law. It also includes proposals to capture more tax revenue from companies’ overseas earnings.
Last week, a trio of Democratic House lawmakers—Reps. Bill Pascrell and Josh Gottheimer of New Jersey and Tom Suozzi of New York—staked out their opposition to changing the tax code without restoring the full SALT deduction. “No SALT, no deal,” they said in a joint statement.
Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.