By Richard Rubin
WASHINGTON -- Lawmakers from New York and New Jersey, looking to
capitalize on new Democratic majorities in Congress, are trying to
repeal the $10,000 cap on the state and local tax deduction as part
of a pandemic-relief bill. But the Biden administration has been
noncommittal, and the move looks likely to wait until later this
year.
The lawmakers say the cap, created in the 2017 tax law, punishes
their constituents unfairly and pushes residents to move to low-tax
states such as Florida. They are pitching the break as crucial to
their states' economic recovery.
"Folks have been moving away in droves since our state and local
tax deduction was gutted," Rep. Josh Gottheimer (D., N.J.) said at
a news conference outside a U-Haul facility in Paterson, N.J. "This
is key to the health of our economy, key to keeping our state
strong."
The House passed a temporary repeal of the cap in 2019 and did
so again last year in a pandemic relief bill, but the
Republican-controlled Senate wouldn't consider the idea, with
members saying the top sliver of households would benefit most.
Now, with Democrats in charge of the Senate -- and New York's Chuck
Schumer as majority leader -- a repeal could be nearing its
moment.
"It looks much better than ever before because of one factor:
Chuck Schumer," said Rep. Tom Suozzi (D., N.Y.), who is introducing
a repeal bill.
He, Mr. Gottheimer, Sen. Kirsten Gillibrand (D., N.Y.) and other
lawmakers from high-tax states are calling for repeal to be
included in the Covid relief bill that Democrats are working on
now.
That is a tall order, however. Repealing what's known as the
SALT (state and local tax) cap would reduce federal revenue by more
than $65 billion a year and expose splits within the party.
Democrats are already struggling with slim majorities, competing
priorities and worries about the size of the coronavirus relief
plan.
The Biden campaign offered vague answers about the cap, which
limits how much people can deduct on their federal tax returns and
resulted in a significant tax increase for some taxpayers,
especially in Democratic-run states with high state and local
taxes. The administration didn't include any change to the cap in
its $1.9 trillion relief plan. The White House wouldn't comment
this week, and Treasury Secretary Janet Yellen dodged the issue
during her confirmation hearing, saying it needed further
study.
Sen. Ron Wyden, (D., Ore.), incoming chairman of the Senate
Finance Committee, said he would lift the SALT cap as part of his
broader tax agenda, which is likely to advance after Congress
finishes a relief bill. Mr. Wyden's language also leaves open the
idea of increasing the cap instead of repealing it.
"With the expiration of jobless benefits just six weeks away,
Congress needs to move quickly on the most urgent items," he
said.
Mr. Schumer is introducing a Senate version of repeal and trying
to corral all Democrats behind a relief bill. He hasn't expressed a
view on exactly how the repeal should advance.
"If you think the people needed and deserved this money before
the coronavirus took hold, the stakes are even higher now because
the cap is costing middle-class families tens of thousands of
dollars," Mr. Schumer said in a statement.
But Leonard Burman, a Clinton administration Treasury Department
official now at the Tax Policy Center, disputed that view, citing
studies showing that more than half of the benefits would go to the
top 1% of households.
"There's a significant group of people who are really, really
hurting, and eliminating the SALT cap would not help any of those
people," he said. Direct federal aid to state governments -- which
congressional Democrats also support -- would be a better approach,
he said.
The politics of the cap, which is scheduled to expire after 2025
like other pieces of the 2017 law, aren't purely partisan. New
Jersey's two Republican House members, Reps. Chris Smith and Jeff
Van Drew, signed a letter this week urging quick repeal. And Mr.
Suozzi's bill includes GOP co-sponsors from three states.
Sixteen House Democrats voted against repeal in 2019, when it
was paired with an increase in the top income-tax rate. They
included progressives concerned about who benefits and
representatives from states without income taxes, such as Texas and
Nevada.
Republicans created the cap in 2017 to generate money to pay for
their broader cuts to tax rates. They also argued that the
unlimited deduction meant the federal government was subsidizing
high-tax state governments. No Democrats in the House or Senate
backed the GOP bill.
"There aren't any merits to [a repeal] as an economic policy or
as a Covid relief measure," said Andrew Moylan, executive vice
president of the National Taxpayers Union Foundation, which is
affiliated with a right-leaning group.
Democrats say the cap's effects go beyond high-income
households. A state trying to raise taxes on the rich knows that
the federal government won't subsidize some of the cost any more.
Mr. Suozzi argues that middle-class taxpayers get hurt if the upper
end of the tax base moves out of the state.
Although the cap disproportionately affects residents of
high-tax states, it didn't cause widespread federal tax increases
there.
In fact, in New Jersey, New York and California, most households
are paying less now than they did under the old tax system. That is
because the cap's effect is countered by other new features,
including lower rates, a larger child tax credit, a bigger standard
deduction and changes to the alternative minimum tax.
"It's one of the great ironies of modern politics," said Rep.
David Schweikert (R., Ariz.) "The very people who most scream and
yell that the wealthy need to pay their fair share, that the
progressive tax system needs to be more progressive, are the very
people who are pushing for the most regressive tax break in our
society."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
January 29, 2021 09:14 ET (14:14 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.