Congress

Senate rejects repeal of state and local tax deduction cap rule

43-52 vote was mostly along party lines

Senate Majority Leader Mitch McConnell conducts a news conference in the Capitol on Tuesday. (Tom Williams/CQ Roll Call)

The Senate rejected an attempt to repeal a Treasury Department rule that thwarts workarounds employed by several states to bypass the $10,000 limitation on state and local taxes that was a key feature of the 2017 tax code overhaul.

The 43-52 vote Wednesday was mostly along party lines, though Kentucky Republican Rand Paul crossed the aisle to vote for the Democrats’ measure, while Colorado’s Michael Bennet, a 2020 Democratic presidential contender, voted against it.

Republicans appeared to relish the chance to turn the tables on Democrats in a tax debate, after having been tagged for favoring businesses and the wealthy in the 2017 law.

“It’s bad enough that my Democratic colleagues want to unwind tax reform, but it’s downright comical that their top priority … is helping wealthy people in blue states find loopholes to pay even less,” Senate Majority Leader Mitch McConnell said as the debate on the repeal resolution began Wednesday.

The resolution does not repeal the SALT cap, though Democrats on the House Ways and Means Committee say they are preparing legislation to at least partially, or temporarily, roll back the $10,000 limitation. The resolution would only repeal the new Treasury and IRS rule blocking features of state tax laws that allow households to get around the $10,000 cap and effectively deduct higher amounts of their state and local taxes from their federal tax returns.

The rule went into effect Aug. 11, but the Congressional Review Act gives Congress a limited amount of time to overturn new federal rules. A similar repeal was filed in the House, but since the law requires both chambers to act within 60 legislative days, the Senate vote effectively ends the effort.

According to the Joint Committee on Taxation, individuals adopted tax planning strategies to get around the new $10,000 limitation. For example, someone living in a state that offers a 100 percent tax credit for certain charitable contributions, with a state tax liability of $30,000, could donate $20,000 to those charities, get the full tax credit and pay the remaining $10,000 in taxes to the state. That would allow the individual to deduct the full $30,000 amount on his or her federal taxes.

The Treasury and IRS rule stipulates that taxpayers can only claim charitable deductions to the extent they don’t receive a benefit in return. So in the case of the household receiving a $20,000 tax credit for the same amount of donations to a state-backed charity, they wouldn’t be able to claim any of that amount as a charitable deduction. But, if they only received a $10,000 tax credit, for example, they would still be able to deduct the rest of the contribution.

Much of the floor debate centered on Republicans targeting high-tax “blue” states when they pushed through their bill capping the SALT deduction and Democrats arguing that “middle-income” households got hit by the limitation.

Democrats described the limitation as aimed at their constituents, with Senate Minority Leader Charles E. Schumer of New York saying that voter anger over the SALT cap was “one of the major reasons the House flipped from Republicans to Democrats.”

Presidential politics

The vote put Democratic presidential candidates, who have been debating wealth taxes and other tax increases on the richest households, in a tough spot.

Bennet said the SALT cap was designed in the first place “to take revenge against people who didn’t vote for Donald Trump, to take revenge against some deep-blue states and districts.” However, he urged fellow Democrats to recognize that the “vast majority” of the benefit of any repeal would go to the wealthiest households.

“We can say we’re for a progressive tax bill and for fighting inequality, or we can support the SALT deduction, but it’s really hard to do both of those things,” Bennet said.

Of the other Democratic senators running for president, New Jersey’s Cory Booker and Minnesota’s Amy Klobuchar voted to repeal the Treasury rule and loosen the SALT cap. Vermont independent Bernie SandersElizabeth Warren of Massachusetts and Kamala Harris of California weren’t present for the vote.

McConnell and other Republicans pointed to a June report from the Joint Committee on Taxation that found that if the SALT cap were repealed for 2019, 94 percent of the resulting $77.4 billion in tax cuts would go to households earning more than $200,000 a year. More than half would accrue to households earning more than $1 million. 

Democrats stressed that the resolution didn’t call for the repeal of the deduction cap, just the repeal of the rule limiting state workarounds. “The regulation we will be voting on impacts state charitable credits virtually across every state, ranging in areas from education to conservation, to child care, and more,” Schumer said.

Paul voted with the Democrats on the resolution to preserve bigger SALT deductions because of his general support for keeping taxes as low as possible.

“During the debate over the [2017] tax bill, Sen. Paul fought to obtain the largest tax cuts possible for all Americans, and he continues to work to achieve even greater cuts,” a Paul spokesman said. “Despite his strong support for the overall tax bill, he disagreed with taking away existing deductions.”

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