Repeal of State-Tax Deduction Cap Pitched for Covid-19 Relief Bill
WASHINGTON—Lawmakers from New York and New Jersey, looking to capitalize on new Democratic majorities in Congress, are trying to repeal the $10,000 cap on the state and local tax deduction as part of a pandemic-relief bill. But the Biden administration has been noncommittal, and the move looks likely to wait until later this year.
The lawmakers say the cap, created in the 2017 tax law, punishes their constituents unfairly and pushes residents to move to low-tax states such as Florida. They are pitching the break as crucial to their states’ economic recovery.
“Folks have been moving away in droves since our state and local tax deduction was gutted,” Rep. Josh Gottheimer (D., N.J.) said at a news conference outside a U-Haul facility in Paterson, N.J. ”This is key to the health of our economy, key to keeping our state strong.”
The House passed a temporary repeal of the cap in 2019 and did so again last year in a pandemic relief bill, but the Republican-controlled Senate wouldn’t consider the idea, with members saying the top sliver of households would benefit most. Now, with Democrats in charge of the Senate—and New York’s Chuck Schumer as majority leader—a repeal could be nearing its moment.
“It looks much better than ever before because of one factor: Chuck Schumer,” said Rep. Tom Suozzi (D., N.Y.), who is introducing a repeal bill.
That is a tall order, however. Repealing what’s known as the SALT (state and local tax) cap would reduce federal revenue by more than $65 billion a year and expose splits within the party. Democrats are already struggling with slim majorities, competing priorities and worries about the size of the coronavirus relief plan.
The Biden campaign offered vague answers about the cap, which limits how much people can deduct on their federal tax returns and resulted in a significant tax increase for some taxpayers, especially in Democratic-run states with high state and local taxes. The administration didn’t include any change to the cap in its $1.9 trillion relief plan. The White House wouldn’t comment this week, and Treasury Secretary Janet Yellen dodged the issue during her confirmation hearing, saying it needed further study.
Sen. Ron Wyden, (D., Ore.), incoming chairman of the Senate Finance Committee, said he would lift the SALT cap as part of his broader tax agenda, which is likely to advance after Congress finishes a relief bill. Mr. Wyden’s language also leaves open the idea of increasing the cap instead of repealing it.
“With the expiration of jobless benefits just six weeks away, Congress needs to move quickly on the most urgent items,” he said.
Mr. Schumer is introducing a Senate version of repeal and trying to corral all Democrats behind a relief bill. He hasn’t expressed a view on exactly how the repeal should advance.
“If you think the people needed and deserved this money before the coronavirus took hold, the stakes are even higher now because the cap is costing middle-class families tens of thousands of dollars,” Mr. Schumer said in a statement.
But Leonard Burman, a Clinton administration Treasury Department official now at the Tax Policy Center, disputed that view, citing studies showing that more than half of the benefits would go to the top 1% of households.
“There’s a significant group of people who are really, really hurting, and eliminating the SALT cap would not help any of those people,” he said. Direct federal aid to state governments—which congressional Democrats also support—would be a better approach, he said.
The politics of the cap, which is scheduled to expire after 2025 like other pieces of the 2017 law, aren’t purely partisan. New Jersey’s two Republican House members, Reps. Chris Smith and Jeff Van Drew, signed a letter this week urging quick repeal. And Mr. Suozzi’s bill includes GOP co-sponsors from three states.
Sixteen House Democrats voted against repeal in 2019, when it was paired with an increase in the top income-tax rate. They included progressives concerned about who benefits and representatives from states without income taxes, such as Texas and Nevada.
Republicans created the cap in 2017 to generate money to pay for their broader cuts to tax rates. They also argued that the unlimited deduction meant the federal government was subsidizing high-tax state governments. No Democrats in the House or Senate backed the GOP bill.
“There aren’t any merits to [a repeal] as an economic policy or as a Covid relief measure,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, which is affiliated with a right-leaning group.
Democrats say the cap’s effects go beyond high-income households. A state trying to raise taxes on the rich knows that the federal government won’t subsidize some of the cost any more. Mr. Suozzi argues that middle-class taxpayers get hurt if the upper end of the tax base moves out of the state.
Although the cap disproportionately affects residents of high-tax states, it didn’t cause widespread federal tax increases there.
In fact, in New Jersey, New York and California, most households are paying less now than they did under the old tax system. That is because the cap’s effect is countered by other new features, including lower rates, a larger child tax credit, a bigger standard deduction and changes to the alternative minimum tax.
“It’s one of the great ironies of modern politics,” said Rep. David Schweikert (R., Ariz.) “The very people who most scream and yell that the wealthy need to pay their fair share, that the progressive tax system needs to be more progressive, are the very people who are pushing for the most regressive tax break in our society.”