By Richard Rubin 

WASHINGTON--The cap on state and local tax deductions would be repealed for two years under a new Democratic proposal that almost certainly won't become law while Republicans control the Senate and White House.

The bill, slated for a House Ways and Means Committee vote Wednesday, signals the Democrats' position on a provision of the 2017 tax law particularly unpopular with residents of high-tax states such as New York, New Jersey and California.

The cap, which expires after 2025, limits the deduction for state and local taxes to $10,000 a year for both individuals and married couples. The cap isn't indexed to inflation.

"It was a real punch in the gut to a lot of different communities," said Rep. Tom Suozzi (D., N.Y.), who is sponsoring the bill with Reps. Mike Thompson (D., Calif.) and Bill Pascrell (D., N.J.) "It's really about fairness."

The bill released late Monday would repeal the cap but only for 2020 and 2021 and make the limit $20,000 for married couples in 2019. To offset the fiscal cost, the proposal would also raise the top individual tax rate to 39.6% from 37% starting in 2020 and expand the income level at which that top bracket starts. That tax increase wouldn't be scheduled to expire.

Republicans created the cap as they reshuffled the tax code, and they used the limit on deductions to generate money to pay for lower tax rates. They tout the provision as a way to prevent federal taxpayers from subsidizing high-tax states.

Senate Finance Chairman Chuck Grassley (R., Iowa) has already declared any changes to the cap dead on arrival. That makes Wednesday's vote and a potential full House vote later an exercise in political positioning, giving Democrats a talking point for 2020 campaigns and showing what they might do if given full control of Congress and the White House. Former Vice President Joe Biden supports repeal, but other top presidential contenders have stayed mostly quiet on the subject.

Democrats and some Republicans opposed the cap as Congress was creating it in 2017, arguing that it unfairly targets some parts of the country and makes it harder for state governments to tax top-earning residents.

In tax returns filed through mid-July, 14.5 million returns claimed $125 billion in deductions for taxes paid, down from 41.7 million and $514 billion a year earlier, according to Internal Revenue Service data.

Still, even in high-tax states, the 2017 law cut the federal tax bill for the most of individuals. That is because many people didn't itemize deductions and take the state and local break in the first place and because others gained from other changes in the tax law, such as the higher standard deduction and the narrowing of the alternative minimum tax.

Democrats successfully used the cap as a political weapon in suburban House races in 2018, but since they took control of the House, they have struggled to figure out what to do with it.

Repealing the cap alone would deliver benefits to high-income taxpayers--more than half the money would go to the top 1% of households--and increase federal budget deficits by $600 billion over a decade. That has created an odd reversal of policy positions, where Democrats are arguing in favor of cutting taxes for the rich.

Lawmakers from New York and New Jersey, among the states hit hardest by the cap, pressed for full repeal paired with an increase in the top individual tax rate to 39.6% so that it wouldn't necessarily be a net tax cut. Such a proposal, which resembles the one introduced late Monday, would fall hardest on high-income residents of low-tax states such as Texas and Florida who got relatively little benefit from the deduction under prior law.

Others, including Reps. Lauren Underwood (D., Ill.) and Sean Casten (D., Ill.), sought a more modest approach that would increase the cap and remove the marriage penalty.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

December 09, 2019 23:35 ET (04:35 GMT)

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