A bipartisan group of House members from high-tax states on Thursday launched a caucus focused on repealing the $10,000 limit on state and local tax deductions imposed as part of the 2017 Republican tax law.
The formation of the caucus comes as some Democrats have pressed to include a repeal of the deduction cap in President Joe Biden’s infrastructure legislation, making the issue a potential obstacle to passage of the entire $2.3 trillion package.
“It is high time that Congress reinstates the state and local tax deduction, so we can get more dollars back into the pockets of so many struggling families, especially as we recover from this pandemic,” Rep. Josh Gottheimer (D-NJ), one of the chairs of the caucus, said at a press event announcing the group.
The new Bipartisan SALT Caucus has 30 members, largely from New York, New Jersey and California, with 21 Democrats and nine Republicans joining to start.
The background: The 2017 tax law limited the deductibility of state and local taxes as a way to offset some of the cost of its tax cuts. Most Republicans supported the cap, with GOP leaders arguing that it would help keep the federal government from subsidizing high-tax states and would force those states to lower taxes to stay competitive. Some Democrats cried foul, arguing that the $10,000 cap was a politically motivated effort to punish blue states and limit the services they provide. “The SALT deduction cap was designed to target blue states,” Rep. Mikie Sherrill (D-NJ) told NBC News recently. “We are being punished for running programs that help our citizens.”
Many Democrats have repeatedly sought to undo the limit. But Democratic lawmakers are divided on the tax. “We can say we are for a progressive tax code and for fighting inequality, or we can support the SALT deduction, but it is really hard to do both,” Sen. Michael Bennet (D-CO) told Vox. And Axios reported earlier this month that senior members of the Biden administration view the cap as good policy — a point reinforced by Biden’s leaving it untouched in his infrastructure proposal.
Analysts have made clear that repealing the SALT cap would overwhelmingly benefit high earners. A 2018 analysis by the Tax Policy Center found that only 9% of households would benefit from eliminating the cap and 96% of the tax gains would go to the 20% of households with the highest income. More than half of the tax cuts would go to the top 1% of households.
“This is a tax cut for people with secure jobs and excellent health insurance, working from expensive homes,” analysts at the Brookings Institution wrote last September. “Rather than reversing the cap, there is a strong case for building on the progress made in the TCJA and eliminating the deduction altogether.”
Supporters of repealing the cap insist that the cap hits middle-class residents in their districts. “The middle class in my district or in many of the districts here is very different than the middle class in other districts in the country,” said Rep. Tom Suozzi (D-NY). “If you make $100,000, $120,000 or $150,000 in my district, that’s middle class – in other parts of the country, that’s seen as being upper-income.”
Why it matters: A number of Democrats have said that they would not support an infrastructure bill unless the SALT deduction cap was reversed. Earlier this week, nearly every Democrat in New York’s House delegation wrote to House Speaker Nancy Pelosi (D-CA) and House Majority Leader Steny Hoyer (D-MD) saying that they “reserve the right to oppose any tax legislation that does not include a full repeal of the SALT limitation.” California Democrats are reportedly also working on a letter about the issue.
Proponents of a SALT cap repeal have more than enough votes to threaten the fate of Biden’s infrastructure plan. But repealing the cap would increase the cost of the overall legislation, adding another challenge to getting the infrastructure bill done. White House Press Secretary Jen Psaki said Thursday that lawmakers advocating repeal would have to figure out how to pay for it. It would cost $88.7 billion to repeal the cap in 2021, according to an estimate from the Joint Committee on Taxation.
Republicans, meanwhile, see an opportunity to score some political points. “Democrats are insisting on a massive tax break for the wealthy, while holding out their support for President Biden’s $2 trillion tax hikes on blue-collar workers and families,” the House Ways and Means GOP said in a post Thursday. “Repealing the cap on SALT deductions will give liberal governors and mayors a green light for across-the-board tax hikes on low- and middle-class families.”