Speaker Nancy Pelosi’s push to undo caps on state and local tax deductions as part of a new coronavirus relief package faces more than just steep opposition in the GOP-controlled Senate, where Republicans are calling it a “nonstarter.”
House Democrats would need to thread the proverbial needle to hit their trifecta of goals: avoiding a windfall for the wealthiest; helping vulnerable swing district lawmakers; and selling “SALT” relief as help for Americans hit by a devastating pandemic.
Pelosi told The New York Times this week she wants to retroactively repeal the $10,000 SALT cap for 2018 and 2019, generating refunds for taxes paid in those years under the rules imposed by the 2017 GOP tax overhaul. A Pelosi spokesman clarified later that Democrats will “include limitations on the higher end” so the benefit would be tailored to the middle class.
Pelosi said the measure would increase disposable income, which she called “the lifeblood of our economy.” And there’s no question two of the states most affected by the SALT cap, New York and New Jersey, are the epicenter of the COVID-19 crisis.
Democrats have long chafed at the SALT deduction limit, which disproportionately impacts constituents in high-tax states like New York, New Jersey and California. Roughly a dozen freshman House Democrats flipped GOP seats in the 2018 midterms in part on pledges to undo the cap.
But the political problem they’ve faced is SALT deductions are inherently skewed in favor of the wealthy who pay a lot of income and property tax, particularly in blue states.
Republicans are already pouncing on Pelosi’s comments.
“We should be trying to help people who truly need it to make it through this very troubled time,” said South Carolina Republican Rep. Tom Rice, a tax attorney and Ways and Means member. “It’s so disappointing and harmful that they would use this crisis to push their agenda and help the top 1 percent.”
Targeting the middle class
In December, the House narrowly passed a bill that sought to blunt GOP attacks by pairing a temporary SALT cap rollback with a permanent marginal tax rate increase for the richest households. That measure would double the SALT cap for married couples in 2019, and then uncap it altogether for 2020 and 2021 — coupled with a rise in the top tax rate from 37 percent to 39.6 percent.
And Republicans successfully pushed a Rice-authored amendment to disqualify households earning above $100 million. But according to Rice, that threshold — which applies to less than 1,000 of the very richest households — would only save $7 billion.
Therefore net tax cuts over the three years of SALT relief would still total more than $100 billion, even with the top rate increase, based on Joint Committee on Taxation data. Almost 90 percent of that benefit would go to households earning more than $200,000.
But one-size-fits-all SALT limits might actually squeeze out intended beneficiaries in higher-income districts. As New York Democrat Rep. Tom Suozzi, author of the House-passed SALT bill, put it in an interview: “The middle class is different in different parts of the country.”
According to Census Bureau data, nearly 60 percent of households in Suozzi’s district earn six-figure incomes, and the median household income is nearly twice the national average. The average SALT deduction in his district was over $33,000 in 2017, according to IRS data.
Similarly, New Jersey Rep. Josh Gottheimer said in an interview that the median property tax alone in his district is about $15,000. “In my district, this is not just for top earners,” the freshman Democrat said. “Raising the cap here is very different than raising the cap somewhere else in the country.”
Backers say there’s a larger issue of fairness to constituents who are being double-taxed and who were fleeing high-tax states even before COVID-19 struck. Suozzi, Gottheimer and about 90 other House Democrats wrote to Pelosi on Tuesday pushing for Suozzi’s bill, or some variation, to move as part of the next aid package.
Since most of those leaving high-tax states due to the SALT cap are upper-income households, “the middle and lower income earners are left behind holding the bag to cover the tax burden,” they wrote. “Some have argued for these states to simply cut services. No one can suggest cutting services at this time is a responsible response to the coronavirus pandemic.”
Also on Tuesday, four New York House Republicans — Lee Zeldin, Peter T. King, Elise Stefanik and John Katko — made similar arguments in a letter this week to Pelosi and Minority Leader Kevin McCarthy.
“Considering the State of New York has been one of the states hit hardest by coronavirus, immediate SALT deduction relief will deliver desperately needed tax aid when it is most needed, providing critical financial help to working families during these difficult times,” they wrote.
President Donald Trump, himself a New Yorker, has at times expressed sympathy for those affected by the SALT cap.
And he’s got his own priorities in the next aid package — such as undoing limits on business deductions for meal and entertainment expenses which were restricted further in the 2017 law — that could be trade bait.
“It’ll keep our restaurants going,” Trump said at a Wednesday press briefing.
It’s not clear how Democrats could structure SALT relief so it doesn’t disproportionately help the rich.
They could substantially lower the $100 million income threshold in the House bill, for example.
But tax experts generally dislike hard caps, which create an unfair “cliff," said Howard Gleckman of the Urban-Brookings Tax Policy Center. Tax break cliffs negate benefit entirely for those earning $1 above an income threshold, while someone $1 below the limit could claim the full tax break.
That’s why phaseouts are typically used, like with the new tax rebates in the massive aid package signed last week that scale down by 5 percent of adjusted gross income above $75,000 for individuals and $150,000 for joint filers. But even a phaseout approach to SALT poses distributional challenges.
Deductions are more valuable the higher one’s tax bracket; and the more deductions, the bigger the savings. Take a family earning $600,000 in Suozzi’s district, which might have had roughly $75,000 in SALT deductions in 2017, based on IRS data.
At a 5 percent phaseout of the benefit for income above $150,000, that household — paying a top rate of 39.6 percent — would get a bigger SALT break than a household making $100,000 in the 22 percent tax bracket, with maybe $15,000 in SALT.
Below $100,000 in income, only about 30 percent of households in Suozzi’s district claimed itemized deductions at all in 2017; their break would be a few hundred dollars at best, on average.
Another approach could be raising the top rate substantially higher than 39.6 percent, but it’s not clear there’s appetite for that among Democrats. The presidential primaries have shown a clear preference for the more moderate brand of tax policy backed by former Vice President Joe Biden.
Though he’d uncap SALT, Biden, like former President Barack Obama, wants to cap the value of itemized deductions at 28 percent so that millionaires can’t claim a larger percentage break than households earning less than $200,000.
But if a millionaire claims $100,000 in SALT deductions, they’d still get a $28,000 tax break, or much higher than a family making one-fifth that amount with proportionally lower SALT deductions.
Approaches backed by some Democrats who defeated GOP incumbents in 2018 would raise the cap just enough to capture middle-income households.
Illinois Rep. Lauren Underwood would set it at $15,000 for individuals and $30,000 for joint filers. New Jersey Rep. Mikie Sherrill would have the SALT cap match the standard deduction, which for 2020 is $12,400 and $24,800 for individuals and joint filers, respectively.
But even those limited breaks would deliver the biggest benefits for those in the highest tax brackets, and it won’t make much of a difference to lower-income constituents in other parts of the country in more lightly-taxed districts.
If the goal is to get money to the middle class, it might be simpler to just write more checks for a flat amount based on family size, like the tax rebates set to go out.
But Democrats took back the House in part because they were able to flip SALT-heavy districts with lots of wealthy taxpayers. “I’m a Democrat who in 2018 just got elected,” said Gleckman, channeling the thinking of some freshmen. “I didn’t promise to give people $1,200 rebates. I promised to get rid of SALT caps.”
‘None of that will matter’
Even among the staunchest advocates for SALT cap repeal, there’s a little queasiness about piling onto the coronavirus relief train.
“If I could give you one of my fingers or part of a finger to get the SALT [cap repeal] passed, I’d do it,” said New Jersey Rep. Bill Pascrell Jr. in an interview.
However, no one should be talking about anything other than equipping the health care industry in the fight against COVID-19, he said: “If we don’t get ahead of the virus, infrastructure, SALT, none of that will matter, none of it.”