Democrats uncertain over ending cap on tax deductions
For Democratic states with high taxes, a sweeping law passed by the Republican-led Congress in 2017 particularly hurt higher-income residents by capping state and local tax deductions at $10,000 a year.
Democrats have ripped the law, then and now.
So with Democrats now in control of Washington, will they reverse it and reduce federal revenue by nearly $80 billion a year when President Joe Biden needs new revenue to pay for his $2 trillion infrastructure plan?
The fight appears set to play out in Congress and statehouses across the nation.
Democratic governors along with House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer of high-tax California and New York, respectively, want the so-called SALT cap repealed.
But so far, Biden, who had supported a repeal, has been more circumspect as he looks to raise corporate taxes to pay for his infrastructure plan.
“If Democrats want to propose a way to eliminate SALT – which is not a revenue raiser, as you know; it would cost more money – 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,” Biden press secretary Jen Psaki told reporters Thursday.
The problem is that in high-tax states, being able to deduct the full amount of state and local taxes, including property taxes, cushions the blow of living in communities where property taxes alone can easily exceed $10,000 a year.
The concern is that the tax law could lead to a further exodus of residents from high-tax states to lower-tax states. New York has lost more than 1 million people to other states over the past decade, and the highest 1% pay about 40% of all the state’s income taxes.
“The largest tax increase hardworking Westchester residents have seen was the elimination of the SALT Tax Cap by the GOP-controlled Congress in 2017,” said George Latimer, county executive in Westchester County, where property taxes are among the highest in the country.
Since the SALT provision was passed by President Donald Trump and Republicans in 2017, it has been a key attack point for Democrats in high-tax states.
New York Gov. Andrew Cuomo led a coalition of states to rail against the law and filed lawsuits to have it overturned, but to no avail.
On Friday, Cuomo and the governors of New Jersey, California, Connecticut, Hawaii Illinois and Oregon signed on to a letter urging Biden to support the SALT repeal.
They estimated the cap has meant New York and California residents have had to pay $12 billion in additional taxes to the federal government annually, as well as another $3 billion a year from New Jersey residents.
“Like so many of President Trump’s efforts, capping SALT deductions was based on politics, not logic or good government,” the governors wrote.
“This assault disproportionately targeted Democratic-run states, increasing taxes on hardworking families. This was unacceptable then, and is simply untenable given the dire economic conditions caused by the pandemic.”
The SALT cap was part of a sweeping tax overhaul that provided larger tax deductions for the middle class and a near doubling of the child tax credit, as well as some breaks for the wealthy and businesses. Many families benefited from the 2017 law, especially in their weekly take-home pay – despite the cap on state and local tax deductions, which mainly hit the rich and upper middle class.
“When the federal Tax Cuts and Jobs Act of 2017 capped SALT deductions at $10,000, millionaire filers who typically pay six or seven-figure sums to the city and Albany essentially lost one of their biggest federal tax breaks,” wrote E.J. McMahon, founder of the Empire Center for State Police, a fiscally conservative think tank in Albany.
In New York, because the SALT cap mainly hurts New York City and its hightax suburbs, Democratic lawmakers from those areas have pushed for the cap’s repeal as part of Biden’s infrastructure plan.
New Jersey Reps. Bill Pascrell and Josh Gottheimer and New York Rep. Tom Suozzi of Long Island made it clear in a joint statement March 30: “No SALT, no deal.”
“Due to the GOP cap, our home states of New York and New Jersey have been crushed and residents have been leaving for other states,” the lawmakers said.
“This impacts middle and lower income residents in high cost of living states who are left to make up the difference.”
Their position, and if more join them, could be a problem for Pelosi. She would be working with a slim majority to get approval for Biden’s infrastructure plan that relies on higher corporate taxes to pay for it.
On Wednesday, Pelosi told reporters the SALT cap under the GOP-led Congress “was devastating” to her home state of California, and the tax bill itself “gave 83% of the benefits to the top 1%.”
But she said urged her Democratic colleagues to “withhold any comment about whether you’re going to vote for a bill or not until you see what the bill is.”
Schumer has also vowed to use his influence to get the SALT cap removed, saying the COVID-19 pandemic made it more crucial to limit the taxes of residents in states with high expenses.
The repeal wasn’t included in last month’s stimulus package, but states and local governments got $350 billion nationwide to address budget gaps caused by the pandemic.
Now Schumer will try to get it into the infrastructure bill.
“When it comes to SALT, New York families needed and deserved this money before the coronavirus took hold, the stakes are even higher now because the cap is costing this community tens-ofthousands of dollars they could be using amid the crisis,” Schumer said in January.
“Like so many of President Trump’s efforts, capping SALT deductions was based on politics, not logic or good government.”
A letter from the governors of New Jersey, California, Connecticut, Hawaii Illinois and Oregon