Prospect of SALT Deduction Increase Gone—at Least for a Few Years

The prospect of increasing how much state and local taxes can be deducted from federal tax bills came to a screeching halt on Friday with the House’s passage of the climate bill and faces an uncertain future, possibly for at least a few years. 

The blow to local and state governments that see the issue affecting their ability to raise taxes came when top proponents for the change opted to support President Biden’s massive climate, health care and tax bill, even though the SALT deductions were left out. 

Time now is running out to push to increase the $10,000 cap Republicans enacted as part of their tax changes in the 2017 Tax Cuts and Jobs Act. 

Republicans could take control of the House or the Senate, if not both, in November’s midterm elections. If they do, it’s unlikely they will undo the SALT deductions cap they enacted.

A problem for those pushing to increase the cap, said Seth Hanlon, who coordinated federal tax policy as ​​President Obama’s special assistant for economic policy, is that the federal budget and other major pieces of legislation Congress is expected to take up in the remainder of the year require bipartisan support to pass the evenly split Senate.

“I don’t think the chances are very good,” he said of raising the cap before Republicans could seize control.

Indeed, Rep. Kevin Brady of Texas noted on the House floor that Senate Republicans tried to amend the climate bill to extend the lower cap on deducting SALT for another year, to 2026.

Brady, the top Republican on the House Ways and Means Committee, criticized Democrats, saying that by blocking the extension, they protected “millionaires and billionaires from high state and local taxes.”

Indeed, the most likely time Congress could consider an increase in the deductions could be until 2025, Hanlon said in an interview with Route Fifty. Congress that year will be discussing what to do about the cap and other provisions of the Trump-era tax changes, which run out at the end of that year.

Hanlon, a former senior tax counsel for Democrats on the House Budget Committee Democratic, is a senior fellow specializing in federal tax and budget policy for the progressive Center for American Progress.

The issue is important to local governments. Members of the National Association of Counties, for example, worry that limiting how much state and local taxes can be deducted from federal taxes makes it more difficult to raise local taxes.

Groups like the NACo had hoped the so-called Inflation Reduction Act passed Friday would increase the amount of state and local taxes that can be deducted to $80,000. However, allowing people to deduct more state and local taxes would primarily benefit those in blue states with higher taxes like New York, New Jersey and California.

Sen. Joe Manchin, a centrist West Virginia Democrat, insisted that SALT not be included in the climate, health care and tax proposal he negotiated with Senate Majority Leader Charles Schumer, a Democrat from New York.

“Our tax code should not favor red state or blue state elites with loopholes,” Manchin said in announcing the deal.

Sen. Robert Menendez, a New Jersey Democrat who has been pushing for the increase, was unhappy the provision was taken out, despite voting for the measure when it was passed by the Senate on Sunday.

“At some point, Joe Manchin is going to want something and I'm not going to go along with it,” Menendez told Route Fifty in an interview last Saturday.

Local government officials also hoped that members of the so-called SALT Caucus including co-chairs Rep. Thomas Suozzi, a Democrat from New York, and Rep. Josh Gottheimer, a New Jersey Democrat, would be able to get an increase in the cap included in the Inflation Reduction Act when it came to the House.

But on Friday, caucus members did not block what may be viewed as Biden’s signature domestic policy achievement over the issue. 

In statements this week, Suozzi and Gottheimer said that while the bill did not allow taxpayers to recoup more of the state and local taxes from their federal taxes, it contained other benefits for their constituents. The bill, among other things, includes $370 billion in climate and energy spending and allows Medicare to negotiate with drug companies to lower prices.

Gottheimer called the bill “a huge win for New Jersey,” in a tweet on Sunday. Suozzi also called the bill a “huge win” in a statement.

Looking forward, both left open the possibility of trying again, but stopped short of vowing to pursue any avenue they can. 

Rather, their statements reflected their argument that they support the legislation because, despite charges from Republicans, they do not believe it would raise taxes.

“This bill passes my key test that I’ve pushed for since day one: it does not raise taxes on individuals, families, or small businesses in my District. The Inflation Reduction Act makes no changes to personal income tax rates or those impacting small businesses,” Gottheimer said.

Saying they would hold the line on taxes, Gottheimer said, “my line in the sand remains the same. If someone tries to raise the tax rates on families in my District, I will insist that we restore the State and Local Tax deduction. This legislation doesn’t raise taxes on families in my district—it reduces the financial burden on them.”

Suozzi also pledged to raise the SALT amount that can be deducted, but only if taxes could go up. ​​

However, neither had pinned raising the cap to offset tax increases when they formed the SALT Caucus, instead saying  that the deduction limits placed by Republicans should be removed to lower taxes for middle-income families.

“The cap on the SALT deduction has been a body blow to New York and middle-class families throughout the country,” Suozzi had said at the time. “At the end of the day, we must fix this injustice.”

Gottheimer had vowed to “get more dollars back into the pockets of so many struggling families —especially as we recover from this pandemic.” 

Spokespeople for the congressmen did not respond to inquiries asking if they see other vehicles than bills that would raise taxes that they could use to raise the cap deduction.

Impacts on Local Governments

Associations representing mayors, counties and governors declined to comment on the decision by SALT Caucus members to support the Inflation Reduction Act.

But in a statement made before the Senate vote, the National Association of Counties, while supporting the climate funding and other aspects of the bill, expressed disappointment that it did not raise the deduction cap.

“NACo supports the full deductibility of all state and local taxes, particularly property taxes, in the federal tax code,” the group said.

NACo has contested the idea that raising the cap would primarily help blue states, arguing at the time the cap was enacted in 2017 that it would affect middle-income families in nearly every county in every state.

In West Virginia, for instance, the group said 88.8% of middle-class families deducted state and local taxes from their federal taxes in 2016. In all, state residents that year deducted $1.2 million—or an average  $9,215 for each taxpayer – from their federal taxes.

However, Hanlon, whose group has said raising the cap should not be a priority for Democrats, said that raising the amount that can be deducted would disproportionately benefit higher-income people.

For example, in New York, people earning more than $200,000 are about 15% of those who take SALT deductions but they claim 62% of the total deductions.

In addition, because the 2017 tax changes doubled the standard deduction, the percentage of middle-income tax filers who itemize their taxes and benefit from SALT has dropped from about 30% to about 10%, he said.

However, some Senate Democrats told Route Fifty in interviews last weekend they were still holding out hope, after supporting the climate bill that they said would bring other benefits to their states.

“Obviously there'd be more work to do but I think it's a great package,” said Sen. Alex Padilla, a California Democrat.

“We're going to keep pushing it,” Menendez said.