WASHINGTON—A bipartisan group of lawmakers is pushing to eliminate the cap on federal tax deductions for state and local taxes (SALT) but many argue that such a move would massively favor the rich.
For decades, the ability to deduct SALT has been an important tax break for taxpayers who itemize deductions on their federal income tax returns. The 2017 Tax Cuts and Jobs Act (TCJA), however, limited the deduction for SALT payments to $10,000 a year. Any state and local individual income or property tax payments in excess of that amount are no longer deductible by taxpayers.
Blue states, especially those with higher individual income and property tax rates, have objected to this cap and some even tried to create tax maneuvers to avoid this limitation.
Democrats last year proposed lifting the cap on the SALT deduction for 2020 and 2021 as part of a COVID relief package. They argued that lifting the cap would provide relief to people hit hardest by the virus, especially in devastated cities such as New York.
A growing number of House Democrats have recently indicated that they wouldn’t support Biden’s infrastructure and tax plan unless the cap is repealed.
Last week, more than 30 bipartisan members of the House formed the SALT Caucus to push for a repeal of the $10,000 limit passed in TCJA. Caucus members stated that the move would provide tax relief to “hard-working middle-class families.”
Critics argue lifting the SALT cap forces people in low-tax states such as Tennessee and Texas to subsidize high-tax states such as California and New York.
Simply lifting the SALT cap, as many Democrats propose, isn’t a solution, according to the left-leaning Institute on Taxation and Economic Policy (ITEP).
Last year, ITEP estimated that repealing the cap would cost more than $90 billion in a single year, with 86 percent of the benefit going to the richest 5 percent.
Progressive Rep. Alexandria Ocasio-Cortez (D-N.Y.) criticized the efforts to hold Biden’s infrastructure plan hostage to demands to repeal the SALT cap.
“I don’t think that we should be holding the infrastructure package hostage for a 100 percent full repeal on SALT, especially in the case of a full repeal,” Ocasio-Cortez told reporters on April 15. “Personally, I can’t stress how much that I believe that is a giveaway to the rich.”
However, she didn’t rule out a negotiation on revising the limit.
“There’s a conversation to be had, I think, about the cap itself, and at what level it’s appropriate, and where we can help families that are really deeply impacted,” she said. “On the other end of it, I don’t believe that a full repeal is just.”