Dueling ‘SALT’ fixes in play as Democrats try to close budget deal

New York, California and New Jersey would be prime beneficiaries of relief from the limits on deductions for state and local taxes

Sen. Bob Menendez  offered a proposal, along with Sen. Bernie Sanders, to provide relief from the limit on federal income tax deductions for state and local tax payments. (Bill Clark/CQ Roll Call file photo)
Sen. Bob Menendez offered a proposal, along with Sen. Bernie Sanders, to provide relief from the limit on federal income tax deductions for state and local tax payments. (Bill Clark/CQ Roll Call file photo)
Posted November 3, 2021 at 6:33pm

House Democratic leaders unveiled their latest compromise proposal on state and local tax deductions Wednesday as part of their updated 2,135-page reconciliation package, but once again they were running into opposition from top Senate Democrats.

The revised House bill would lift the current $10,000 cap on "SALT" deductions that's in place through 2025 to $72,500 retroactive to the start of this year, and extend that through 2031. Rep. Tom Malinowski, D-N.J., who worked on the plan with Rep. Katie Porter, D-Calif., said it would be roughly budget neutral.

"It was not going to be sustainable to do SALT in a way that costs hundreds of billions of dollars. And so we devised a way to do it that gives between 96 and 99 percent of my taxpayers in my district the full deduction, but that is also revenue-neutral and stable over 10 years," Malinowski said.

Malinowski's and Porter's plan had support from House progressives, according to Congressional Progressive Caucus Chair Pramila Jayapal, D-Wash. But it wasn't clear other House lawmakers from affected states were ready to sign on, including Rep. Josh Gottheimer, D-N.J., who reserved comment until he'd had a chance to review the measure.

Meanwhile across the Capitol, Senate Budget Chairman Bernie Sanders, I-Vt., and Sen. Bob Menendez, D-N.J., countered with their own plan to keep the $10,000 ceiling in place but exempt households making up to somewhere between $400,000 and $550,000 a year, depending on budget estimates from the Joint Committee on Taxation that hadn't come back yet.

Both plans would mark a substantial change from a proposal Senate Majority Leader Charles E. Schumer, D-N.Y., floated Tuesday to eliminate the cap completely for five years but then reinstate it in 2026 at the old $10,000 figure. Gottheimer and other House Democrats from New York and New Jersey initially got behind that plan.

Sanders said that would cut taxes for the richest households, however, while Menendez and others said it would ultimately raise taxes on households earning less than $400,000 when the cap snapped back into place.

"Our offices have agreed in principle on a compromise proposal that would eliminate the SALT cap on middle-class families that need it the most," Sanders said at a news conference with Menendez. “What’s most important is there is now an understanding that it would be totally unacceptable from a financial and a political point of view to give massive tax breaks to the wealthiest people in this country by completely repealing the SALT cap.”

Menendez said the Senate plan, at least at the higher end of the income range he and Sanders have floated, would exempt 98 percent of New Jersey households from SALT limits and would be revenue-neutral. "I think this is a hard position to be against," he said.

But Malinowski, who's considered one of the most vulnerable House Democrats in a suburban district he flipped in 2018, said the Sanders-Menendez plan wouldn't work as intended. He gave the example of Amazon.com founder Jeff Bezos, who claims very little annual income.

"One challenge with an income cap is that if you're Jeff Bezos, your income was $86,000 last year, so it may not achieve what they're trying to achieve," Malinowski said. "This is simple, straightforward, everyone can understand it. It will cover virtually every single taxpayer without costing us a cent."

Democrats could go to the House floor later this week on the reconciliation bill with the existing SALT language intact, but then face amendments in the Senate during that chamber's unruly "vote-a-rama" series of votes allowed in the budget process.

'Magic' number

Sanders said that despite Malinowski's claims of budget neutrality, his understanding was the proposal might cost something like $50 billion. But Malinowski and Ways and Means Chairman Richard E. Neal disputed that, with Malinowski noting he specifically set the cap at $72,500 after looking into what the "magic" number would be to make the proposal revenue neutral.

Still, every little bit will count as senators have to comply with that chamber's "Byrd rule" governing eligibility under reconciliation.

Deficit concerns are also key with pressure on Democrats to clamp down on spending from Sens. Joe Manchin III of West Virginia and Kyrsten Sinema of Arizona — crucial votes in the Senate where Democrats can’t lose a single vote from their party to pass the filibuster-proof package.

Neal said after both proposals were out Wednesday, he'd heard from Gottheimer and other House proponents of SALT repeal, including Reps. Tom Suozzi of New York and Mikie Sherrill of New Jersey. He said he'd gotten "probably at least 20 suggestions" on the issue while members were on the House floor voting in the late afternoon.

Neal acknowledged Menendez and Sanders also put out a plan, but cautioned against members with strong opinions on SALT weighing in as they work to come to an agreement. "I'm looking for an outcome of achievement here, rather than highlighting the differences," he said.

Republicans created the temporary SALT cap in their 2017 tax law as a way to pay for other tax cuts.

It primarily impacts high-tax blue states, leading to objections from many Democrats, who’ve said the cap makes it more difficult for states to charge more in taxes to fund liberal policies. A select few progressives including Sanders have been less willing to address the issue, concerned so much of the benefit of ending the cap early would go to the wealthiest Americans.

New York, California and New Jersey would be prime beneficiaries of SALT cap relief. California had the highest income tax rate in 2021, according to TurboTax, while New Jersey came in third and New York seventh. Vermont came in eighth. Meanwhile a few New Jersey counties levied the nation's highest property taxes, TurboTax said.

David Lerman contributed to this report.