Should the Deduction Cap on State & Local Taxes Be Increased to $15k? (H.R. 1757)

What is H.R. 1757?

(Updated October 15, 2019)

This bill would increase the limits on the amounts individuals can deduct on certain state and local taxes. Specifically, it would increase the current cap on State and Local Tax (SALT) deduction from $10,000 (enacted in the 2018 Tax Cuts and Jobs Act) to $15,000 for individual filers and $30,000 for joint filers, in addition to indexing the caps to inflation.

Argument in favor

The state and local tax (SALT) deduction is an important source of tax relief for residents of high-tax states, such as Illinois. The SALT deduction cap hurts the middle class in high-tax states, and should be restored to ensure that families living in high-tax states aren’t punished for where they live.

Argument opposed

The SALT deduction primarily benefits those who are upper middle class or better and isn’t a major factor for real middle class families, most of whom don’t itemize their tax returns (and therefore can’t claim the SALT deduction). Eliminating the SALT deduction cap increases the deficit to help the rich.

Impact

Married couples; taxpayers who previously claimed over $10,000 in SALT deductions; top individual income earners; and the IRS.

Cost of H.R. 1757

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Rep. Lauren Underwood (D-IL) introduced this bill to alleviate the burden of the Tax Cuts and Jobs Act:

“As families in [my home district] the 14th District file their taxes this year, many are getting horrible and unexpected news—they owe thousands more than they did last year because they can no longer deduct all of their state and local taxes, thanks to changes in the recently-enacted Republican tax law. This is unacceptable, our community does not deserve to be double-taxed. My legislation would alleviate this burden for middle class families in our community.”

Rep. Sean Casten (D-IL), an original cosponsor of this bill, adds:

“Residents of the 6th District are already filing tax returns and feeling the sting of the increased tax burden imposed on them through the work of my predecessor. With this legislation, I’m seeking to lift that burden, raise the SALT cap and restore the longstanding concept underlying the SALT deduction that citizens shouldn’t have to pay taxes twice.”

Prior to introducing this bill, Reps. Underwood and Casten wrote to the Internal Revenue Service (IRS) to request that it help Illinois taxpayers adversely affected by the TCJA:

“As the 2019 tax-filing season opens, we write on behalf of Illinois working families who are being hurt by the new and disproportionate tax burdens caused by the Republican tax law that was enacted in 2017. We are concerned that the Internal Revenue Service’s (IRS) current efforts may be insufficient to alleviate these burdens. Illinoisans are already facing higher federal taxes due to the Republican tax law, which places a uniquely large burden on middle-class families in the Illinois 6th and 14th Congressional Districts. As you are aware, this law limited the state and local tax (SALT) deduction to just $10,000 for individuals and families—a devastating financial blow to many of the nearly two million Illinois households that claim the deduction. SALT taxes allow our communities to pay law enforcement and first responders, offer high-quality public education, and provide a multitude of other services that contribute to the well-being of our communities. Now, however, working families are being unfairly double-taxed. We believe the penalty waiver announced by the IRS on January 16, 2019, does not sufficiently ease the financial strain that changes to the SALT deduction cause our constituents… We urge your attention to this important matter and request an update in writing on the IRS’s actions to address these burdens on Illinois taxpayers no later than February 12, 2019.”

In early February 2019, President Trump said he was “open to talking about” SALT revisions. In a White House meeting with a small group of regional reporters, he said, “There are some people from New York who have been speaking to me about doing something about that, about changing things. I’d be open to talking about it.” However, he didn’t specify what changes he’d be open to.

Senate Finance Committee Chairman Chuck Grassley (R-IA) has made his opposition to raising the SALT cap clear. After President Trump made his comments on being “open to talking” about this issue, Sen. Grassley’s spokesman, Michael Zona, said, “The Senate Finance Committee won’t be revisiting the SALT deduction reforms made in the Tax Cuts and Jobs Act under Chairman Grassley’s leadership.” Zona added:

“It’s ironic that the same Democrats who criticized the Tax Cuts and Jobs Act for supposedly benefiting only the wealthy are now advocating for a change to the law that would primarily benefit the wealthy.”

Finally, Zona argued that instead of raising the SALT deduction at the federal level, states should instead lower their own taxes.

This bill has three Democratic cosponsors.

While blue-state lawmakers have introduced other bills — including the Stop the Attack on Local Taxpayers (SALT) Act of 2019 — to fully eliminate the SALT deduction cap, Reps. Underwood and Casten believe the more targeted approach in this bill will bolster its odds of passage and focus tax relief toward middle-class households, rather than the wealthy.

Of Note: The Tax Cuts and Jobs Act capped the state and local tax deduction at $10,000 for individuals and $5,000 for married couples filing separately, in part because the standard deduction was doubled to $12,000 for individuals and $24,000 married couples with joint returns — meaning fewer taxpayers would need to itemize and claim the deduction. Prior to the enactment of this Republican tax law, taxpayers who itemized could deduct their state and local property and income taxes without limitation.

The state and local tax deduction can only be claimed by taxpayers who itemize their returns, so it generally benefits higher earning taxpayers. According to data from our partners at USAFacts, a non-partisan civic data initiative, the average tax savings from claiming the deduction per return in 2015 for taxpayers making less than $61,000 was $144; whereas taxpayers making more than $113,000 saved $1,569 on average and the top 1% of taxpayers saved an average of $21,723. In 2017, data from USAFacts put the total amount of taxes deducted using SALT at $104.1 billion.

The Hill reports that although some taxpayers are expected to see tax increases due to the SALT deduction cap, most people in high-tax states are getting tax cuts for the 2018 tax year. The Hill adds, “Many taxpayers in high-tax states had their SALT deduction disallowed prior to the GOP tax law because they were subject to the alternative minimum tax (AMT). They are now getting a bigger SALT deduction because the tax law reduced the number of people subject to the AMT.”

Media:

• Sponsoring Rep. Lauren Underwood (D-IL) Press Release
  
• The Hill
  
• CNBC
  
• Countable (Related Bill)