A push to lift the $10,000 state and local tax deduction cap is once again holding up major tax legislation.
SALT was the culprit in at least one of the two failed attempts in 2021 by Democrats to bring their Build Back Better tax package to the House floor. That bill finally passed on a third try, but Democrats were hammered by Republicans for including an $80,000 SALT cap that would have primarily benefited the top 5 percent of wage earners.
Now it’s the summer of 2023, and a push mainly by GOP members from New York is behind the stalling of the House GOP’s three-bill tax package advanced by the House Ways and Means Committee in June. Republicans on the committee had hoped to quickly bring the package to the floor, but resistance from members from high-tax states who want to raise the SALT cap gummed up the works.
In 2021 then-Ways and Means Committee Chair Richard E. Neal, D-Mass., was charged with fixing the insoluble: negotiating a tax package that assuaged the SALT crowd while cutting taxes for low- and middle-income households. Neal variously described those SALT negotiations as “punishment on earth for me” and “the bane of my existence.”
So, how happy is Neal, now Ways and Means’ ranking member, to see Republicans with a SALT problem of their own?
“Overjoyed,” Neal told reporters in an interview shortly before Congress left for its August recess. “In the majority, they’ve now discovered that their majority hinges upon six people who really need some SALT relief.”
“No SALT, no deal . . . For real,” tweeted Rep. Nick LaLota, R-N.Y., one of a group of New York GOP members reported to be pushing for an increase in the SALT cap. LaLota was echoing the sentiments of Democrats who formed the No SALT, No Deal Caucus in the last Congress.
Republicans who want to raise the cap — numbering 10 at a press conference earlier in the year — met with Ways and Means Chair Jason Smith, R-Mo., in June after the tax package advanced out of committee. Republican leaders say the continuing demands of the SALT group are keeping the tax package from reaching the floor.
Talks have been ongoing and are likely to result in success, said Ways and Means member Darin LaHood, R-Ill., a senior member of Smith’s caucus.
“I think a lot of discussion, a lot of dialogue—it’s a bit of an irritant now, but I think we’re going to get through it,” LaHood said.
North of $20,000
Arguably making things more difficult is House Republicans’ insistence on a return to regular order, which would favor a tax package coming to the floor as stand-alone legislation rather than being lumped into a year-end omnibus spending package.
But the problem isn’t how the tax bill would come to the floor; it’s reaching an agreement, said Jonathan Traub of Deloitte Tax LLP’s Washington National Tax office.
“The struggle is do you reward members who use their leverage in a situation like this or do you try to get them to not be barriers?” said Traub, who says he’s heard the SALT group wants the cap lifted by a lot. They “wanted a lot more than $20,000,” he said.
Raising the SALT cap is an issue that falls flat with a large majority of Republicans. Ways and Means member Kevin Hern, R-Okla., is chair of the Republican Study Committee, a policy group boasting membership of 176 of the House’s 222 Republicans. Hern was quoted in July as saying that few of the group's members would support raising the SALT cap.
“I was being generous. I don’t know of any,” he said when asked about that estimate.
Such a big increase in the cap would require Republicans to forget two years of describing Democrats’ plans to raise the cap as a giveaway to the rich.
“This is one of those cases, be careful of the arguments you made because they’ll come back and haunt you,” said Ways and Means member Daniel T. Kildee, D-Mich.
If Republicans want to pass their own tax package on the House floor, then SALT is a big deal, but the only way a tax package gets through both chambers is if it’s bipartisan, and SALT wouldn’t matter in that case, said Dustin Stamper of Grant Thornton LLP.
“If they get a bipartisan deal on extenders and the child tax credit, then they’ll be able to scrape up enough votes between the two parties to get it through without any SALT relief on there,” Stamper said.
Embrace the Inevitable
The $10,000 SALT cap expires with the Tax Cuts and Jobs Act at the end of 2025. Absent any change, it would go back to being unlimited in 2026.
But it’s hard for a Congress looking for pots of money to fund new spending or tax cuts to ignore the boon to be had from extending the SALT cap. Continuing the $10,000 cap beyond 2025 would raise $935 billion between 2026 and 2033, or nearly $120 billion a year, according to a recent estimate from the Committee for a Responsible Federal Budget.
Because budget scores are typically over 10 years, the closer Congress gets to the end of 2025, the more extending the SALT cap will reap. By 2024 it will be an enticing $1 trillion or more.
But SALT relief that overwhelmingly favors the wealthy at the expense of low- and middle-income households has PwC’s Rohit Kumar setting the odds of the return of an unlimited SALT cap at “basically zero.”
If Congress does nothing and rides over the TCJA’s fiscal cliff at the end of 2025, that would bring about the elimination of the SALT cap and large tax cuts for high-income households.
“The SALT cap would come back as unlimited, but the vast majority of taxpayers on whose behalf these members are advocating would be worse off, would have a much higher tax burden than if we extended everything as written,” Kumar said.
Instead of holding out for a repeal of the cap, advocates should instead negotiate the highest cap they can get by offering to extend it beyond 2025, Kumar said.
“If you think some extension of the SALT cap is inevitable, then you ought to get something for it near term that facilitates your near-term political needs, rather than kind of throwing a Hail Mary pass,” Kumar said.
Ways and Means member Bill Pascrell Jr., D-N.J., a founding member in 2021 of Democrats’ No SALT, No Deal Caucus, echoes that advice.
“There were many who supported this who said, ‘My way or the highway,’ many Democrats,” Pascrell said of Democrats’ push for SALT relief in the last Congress. Pascrell said that unwillingness to negotiate cost the group, which was left out of later negotiations on the reconciliation bill that morphed into the Inflation Reduction Act.
Like New Jersey Democrats in 2021, Republicans in New York are under pressure to provide some SALT relief, Pascrell noted.
“They said a lot of things. Let’s see if they back down,” he said.