New York House Democrats Demand Repeal of Cap on State & Local Tax Deduction in Upcoming Tax & Spending Package
Do you support or oppose repealing the cap on the state & local tax deduction?
by Causes | 4.15.21
- A group of House lawmakers who support the repeal of the cap on the state and local tax (SALT) deduction announced the creation of the SALT Caucus on Thursday.
- The SALT Caucus has 32 founding members, including 24 Democrats and eight Republicans. All of the lawmakers in the caucus come from states with high state and local taxes, including New York, New Jersey, California, Illinois, Maryland, Connecticut, and the District of Columbia.
What’s the story?
- Nearly all of the Democratic members of New York’s House delegation sent a letter to House Speaker Nancy Pelosi (D-CA) and Majority Leader Steny Hoyer (D-MD) to demand that the upcoming package of tax and spending proposals include a full repeal of the cap on the state and local tax (SALT) deduction.
- The SALT deduction is politically popular among lawmakers from areas with high state and local tax burdens as most of the benefit from lifting the cap would go to higher income taxpayers from those states. However, the significant cost of repealing the cap makes it a challenging provision for Democrats to include in the upcoming package.
- The 17 New York Democrats who signed onto the letter initiated by Reps. Jerry Nadler and Tom Suozzi represent a large enough voting bloc within the Democratic caucus to block the package given Democrats’ narrow majority. At present, House Democrats can only lose the support of only two of their members and still pass legislation on a strictly party-line vote.
What is the SALT deduction?
- Taxpayers who itemize their tax return can claim the SALT deduction, which allows them to deduct state and local income, sales, and property taxes up to the limit and thereby reduce their federal tax liability.
- The enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017 capped the SALT deduction at $10,000 for individuals. The TCJA also doubled the standard deduction, meaning that fewer low- to middle-income taxpayers would need to itemize and claim the SALT deduction.
- Since the Tax Cuts and Jobs Act took effect with the 2018 tax year, federal tax revenue foregone due to the SALT deduction has decreased. This USAFacts chart shows how the foregone SALT revenue went from a high of $104 billion in 2017 to $37 billion in 2018 and $10 billion in 2019:
- This USAFacts chart breaks down the above figure into revenue foregone due to the SALT deduction attributed to state and local property taxes versus income and sales taxes, as property taxes outpaced income and sales taxes each year:
Who benefits from the SALT deduction?
- An analysis by the nonpartisan Joint Committee on Taxation (JCT) ― which advises Congress on the effects of tax policy ― found that in tax year 2017 nearly all of the benefit of the SALT deduction went to high-income taxpayers.
- JCT found 71% of the benefit (or more than $49 billion) went to households earning over $200,000 in tax year 2017 while 22% (over $15 billion) went to taxpayers earning between $100,000 and $200,000. Only 6% ($4.6 billion) went to taxpayers between $50,000 to $100,000 whereas effectively 0% (less than $600 million) went to taxpayers earning less than $50,000. The TCJA cap on the SALT deduction had little impact on the relative distribution of the SALT deduction benefit between those income tiers in the JCT’s comparison to the 2019 tax year.
- Additionally, the JCT found that repealing the cap on the SALT deduction has a significant cost, as it estimated that repealing the SALT cap for tax year 2018 would’ve decreased federal revenues in fiscal year 2019 by $77.4 billion (due to allowing more state and local taxes to be deducted from taxpayers' federal tax liability).
- The Congressional Research Service (CRS) used data from the Census Bureau and Internal Revenue Service to analyze which congressional districts had the highest effective SALT rates and the income levels of residents in those districts. CRS found 19 out of the 20 districts with the highest effective SALT rates had an average adjusted gross income (AGI) over $100,000 and four of the top five had an average AGI over $200,000.
- Congressional districts with the highest average SALT deduction were in New York, California, Connecticut, and New Jersey ― particularly districts in or near the New York City metropolitan area across NY, NJ, and CT; Southern California; and the San Francisco Bay Area.
— Eric Revell
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