Democrats search for sweet spot on ‘SALT’ deduction

Compromise may be at hand over state and local tax deduction

New Jersey Rep. Bill Pascrell Jr. says he’s willing to accept less than a full repeal of the state and local tax deduction. (Tom Williams/CQ Roll Call file photo)
New Jersey Rep. Bill Pascrell Jr. says he’s willing to accept less than a full repeal of the state and local tax deduction. (Tom Williams/CQ Roll Call file photo)
Posted July 1, 2021 at 5:30am

House and Senate Democrats are struggling to balance a general desire to make the wealthy pay their fair share with regional interest in restoring a tax break that disproportionately benefits upper-income households.

The party has yet to find a solution to its “SALT” problem, but Democrats on both sides of the debate over the deduction for state and local taxes are ready to compromise. 

Republicans capped the SALT deduction at $10,000 in their 2017 tax law, leading 10 Republicans from high-tax states New Jersey and New York to vote “no.”

There’s bipartisan support for repealing the cap, set to expire after 2025. But Democrats are looking to address the issue in a filibuster-proof budget reconciliation bill this fall that’s expected to offset trillions of dollars in new spending with tax increases that won’t get GOP support.

House Democrats can’t lose more than three votes on their side after a July 27 runoff between two Republicans to fill the vacancy in Texas’ 6th District. Senate Democrats can’t lose any in that 50-50 chamber.

A compromise short of full repeal appears to be the direction Democrats are headed, lawmakers and aides say. They may lose two House Democrats — New York’s Tom Suozzi and New Jersey’s Josh Gottheimer — who  have taken a hard line. But more limited SALT relief is seen as satisfying enough lawmakers to avoid sinking the broader bill.

New Jersey Rep. Bill Pascrell Jr., who earlier this year joined Suozzi and Gottheimer in pledging “No SALT, no deal,” said in a brief interview that he’s willing to accept less than full repeal. “I wanted to say I’d set [the cap] to about $25,000. But I’ll settle for [$20,000],” he said.

Support for the SALT deduction has always fallen more on regional lines than ideological ones.

Top Democrats such as Senate Majority Leader Charles E. Schumer of New York and Speaker Nancy Pelosi of California support repealing the cap because it would benefit their constituents. But they’re also conscious of concerns from Democrats in lower-tax states that the deduction, which can only be claimed by taxpayers who itemize, helps wealthy households the most.

A 2019 Joint Committee on Taxation report projected that 94 percent of the benefits of SALT cap repeal that year would go to taxpayers earning $100,000 or more. But about one-third of returns claiming the deduction would be households in the $100,000 to $200,000 range, the JCT found. In states like New York, New Jersey and California, with higher costs of living, those are middle-income earners.

Sanders proposal

A sign that a potential SALT compromise is in the offing was Senate Budget Chairman Bernie Sanders, I-Vt., setting aside just $120 billion for relief from the $10,000 cap in a draft budget outline. The JCT has told Suozzi’s office that his bill to repeal the cap would cost $385 billion.

Sanders didn’t include a specific proposal, but he wants to limit the deduction so it can’t be claimed by the richest taxpayers. 

“We’re looking at various options,” Sanders said last week. “In high-tax states, it is fair that people can take a serious deduction. On the other hand, when you’re looking at billionaires that own multimillion-dollar mansions, should they be able to get the complete deduction? No.”

A source familiar with Sanders’ thinking said he’d be comfortable repealing the cap but phasing out the deduction for those making more than $400,000 annually. That’s the income threshold President Joe Biden has used to limit his tax increase proposals to ensure they’re targeted at high-income earners. 

The JCT estimates that if the $10,000 cap were repealed, 71 percent of the benefit would go to households making $500,000 or more. 

‘Positive development’

Despite their push for full repeal, Suozzi and Gottheimer welcomed Sanders’ set-aside for partial relief. 

“That’s a very positive development that Sen. Sanders has included that in his proposal,” Suozzi said at a news conference last week with union representatives who back his proposal to repeal the $10,000 cap. They include teachers, police and firefighters who benefit from the break personally and also want to ensure states and local government services are funded. 

“I can’t speak for everybody else … but for me ‘No SALT, no deal’ is we want full repeal,” Suozzi added. “If you want to change anything in the tax code, you’re not going to get my vote unless you repeal the SALT cap.”

Gottheimer said Sanders’ recognition of the need for SALT relief is a “good signal” that he and other progressive Democrats are starting to recognize it’s “not just a well-to-do issue.” But he’s not yet ready to compromise.

“Right now, I am for a full repeal,” Gottheimer said. “I have to look at the totality of [the package] … so it’s hard to give a hard-line answer on anything.”

So far, 96 House Democrats have co-sponsored Suozzi’s bill to fully repeal the SALT deduction cap, and a dozen Senate Democrats have signed on to Schumer’s companion measure.

A Democrat backing full repeal, speaking on the condition of anonymity, said most repeal proponents are willing to settle for a compromise as long as it provides relief to middle-income homeowners who pay high property taxes.

New York Democrat Alexandria Ocasio-Cortez, virtually the only member from a high-tax state opposed to full repeal because of concerns about giving tax breaks to the rich, said she’s noticed more lawmakers interested in compromising on the issue. 

“Full repeal is where we have an issue,” she said. “But there’s certainly areas of flexibility where we can dial in on families that really are getting squeezed in places like New York with really high costs of living.”

‘Still looking at it’

The tax-writing committees are expected to do the heavy lifting in finding a SALT compromise. Both chairs have acknowledged the need to address the cap in a reconciliation bill but say they’ve not yet developed a proposal to thread the needle. 

“We’re still looking at it,” House Ways and Means Chairman Richard E. Neal said in a brief interview Tuesday.

The Massachusetts Democrat, who has personally supported full repeal, declined to speculate on whether a compromise solution would simply raise the cap or cut off the deduction at a certain income threshold. “But I’m hearing a lot about it,” he said.

“Republicans intentionally targeted middle-class homeowners in Democratic states, and we’re looking to provide relief to those homeowners. Conversations are ongoing on how we’re going to do it,” Senate Finance Chair Ron Wyden, D-Ore., said in a statement.

Several top GOP targets from states such as California, New Jersey and Illinois are among those complaining the cap takes a bite, including Democrats who ran and won in 2018 in part on a pledge to get rid of the SALT limit that Republicans imposed.

But most Democrats in swing districts come from lower-tax states, where the $10,000 cap isn’t an issue. If they vote to raise or eliminate the SALT cap, Republicans will undoubtedly run attack ads hitting them for supporting a tax break for the wealthy. 

Rep. Stephanie Murphy isn’t one of the most endangered Democratic incumbents, but Republicans think they have a chance to defeat her next year, especially if redistricting puts more GOP voters in her central Florida district. Murphy in many ways personifies the obstacles backers of full cap repeal face. 

She’s co-chair of the fiscally conscious Blue Dog Coalition and sits on Ways and Means. Murphy said SALT relief “does virtually nothing” to help her constituents since Florida has no income tax.

“We’ll see if there’s a path forward for … some kind of compromise position,” Murphy said Tuesday at a BakerHostetler webinar. “But at a time when we are looking for revenues … it’s hard to make the argument to lift this cap because we’re going to have to find a way to pay for that too.” 

Paul M. Krawzak contributed to this report.