Democrats at odds over SALT changes

Democrats in the House and Senate are clashing over how to address a tax break that has a disproportionate impact on a number of blue states.

Democratic lawmakers in both chambers want to make changes to the $10,000 state and local tax (SALT) deduction cap, a GOP creation, as part of their sweeping social spending and climate change legislation, but they have chosen different tactics: The House proposes substantially raising the level of the cap, while key senators back exempting taxpayers under a certain income level.

Reaching a resolution will be necessary before Democrats get a version of the budget reconciliation package to President Biden’s desk.

Republicans passed the $10,000 SALT deduction cap as part of their 2017 tax law, as a way to help offset the cost of tax cuts elsewhere in the bill. The cap is currently scheduled to expire after 2025.

The cap has long been disliked by politicians in high-tax states such as New York, New Jersey and California, who argue that the limit hurts their residents as well as the states’ abilities to provide services. But the cap is a tricky issue for Democrats because analysts across the ideological spectrum have estimated that fully repealing it would cost hundreds of billions of dollars and largely benefit high-income households.

Democrats waited for months to publicly release proposals about how to address the SALT deduction in the spending package, only beginning to do so last week.

The most recent version of the House’s bill would raise the cap from $10,000 to $80,000, holding it at that level through 2030. The cap would then revert back to $10,000 for 2031.

The proposal is estimated to raise about $14 billion over 10 years, House Ways and Means Committee Chairman Richard Neal (D-Mass.) says. Neal described the negotiations around the SALT issue in the House as challenging and emotionally fraught.

“If you moved like an inch this way, then the suspicion settled in, and if you moved an inch that way, the suspicion settled in,” he told reporters last week.

The House provision is backed by the lawmakers who have been most aggressively insisting on SALT deduction cap changes. Democratic Reps. Josh Gottheimer (N.J.), Thomas Suozzi (N.Y.) and Mikie Sherrill (N.J.) said in a statement last week that the change “will put money back in the pockets of hardworking, middle class families in our districts and help ensure that our local communities can continue making the investments that we need.”

But Sens. Bernie Sanders (I-Vt.) and Bob Menendez (D-N.J.) said last week that they are developing a proposal that takes a different approach, keeping the cap at $10,000 and making it permanent, but including an exemption from the limit for taxpayers with income under a level between $400,000 and $550,000.

The proposals have some similarities. They are both aimed at allowing the vast majority of households to be able to deduct all of their state and local taxes, and they are both designed not to add to the deficit.

But both House and Senate Democrats argue their approach is the better one.

Rep. Tom Malinowski (D-N.J.), who helped develop an initial version of the House proposal with Rep. Katie Porter (D-Calif.), raised concerns about an income-based exemption for the cap.

“Income limits are tricky in part because there are very wealthy people who don’t have a lot of income,” Malinowski told The Hill Tuesday. “Meanwhile, in districts like mine … there are people who may make more than $400,000 a year but who would not be considered wealthy because of the cost of living.”

Additionally, Malinowski said, the House proposal is further along in its development.

“We can’t really have a conversation about alternative proposals until we see how they achieve at least revenue neutrality,” he said.

Sanders and Menendez, however, have argued that their proposal is the correct approach for preventing wealthy people from getting a huge tax break.

Sanders said at a press conference last week that while raising the cap is better than fully repealing it, an increase in the cap “still is quite regressive.” Menendez said at the same conference that about 98 percent of New Jersey property taxpayers would be exempt from the cap under the senators’ proposal.

The collaboration between Sanders and Menendez is notable because Sanders is a leading progressive and Menendez is from one of the states where the SALT deduction cap has been a major issue.

A number of tax experts say that the senators’ approach makes more sense than the House proposal.

“It’s a more targeted approach toward the middle class and doesn’t give a gratuitous tax cut to very high-income people,” said Seth Hanlon, senior fellow at the left-leaning Center for American Progress.

Hanlon pushed back on Malinowski’s concern that an income-based exemption would be abused by wealthy people with little income, saying there is only so much that a taxpayer in that situation can benefit from the SALT deduction.

The left-leaning Institute on Taxation and Economic Policy released an analysis finding that the House proposal would provide more of its benefits to households in the top 1 percent of income than the Senate one. The think tank also estimated that the Senate proposal would be less expensive in the near-term.

Both House and Senate Democrats said that they are in touch with lawmakers in the other chamber to work out a deal on the SALT issue.

“Sen. Menendez continues to work with Sen. Sanders to refine their revenue neutral proposal in a way that benefits the largest number possible of middle-class families in high-cost states like New Jersey,” a spokesperson for Menendez said. “He’s been engaged with Senate and House colleagues to advance this important issue.”

A final agreement on changes to the SALT deduction cap may not come immediately. House Democrats are not expected to pass their version of the social-spending bill until at least next week. The Senate is then expected to make a number of changes to the bill before holding its vote.

“I told the senators I’m open to their approach, and they told me that they’re open to ours,” Malinowski said. “We have a little time to figure out what approach or combination of approaches best achieves the goal.”

Some progressives have been critical of putting SALT deduction cap changes in the spending bill because of the potential benefits for high-income taxpayers. But the inclusion of a provision to roll back the cap is not expected to prevent progressives from supporting the overall package, which includes spending in areas such as child care, health care and climate.

“It may be one of those things that we don’t like, but it’s going to be in there,” Congressional Progressive Caucus Chair Pramila Jayapal (D-Wash.) told reporters last week.