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SALT cap: Democrats still batting around ideas for how to reinstate the contentious tax rule

In the negotiations over the Democrats' social spending package, the fate of the State and Local Tax (SALT) cap has been one of the hardest to pin down.

At some stages, the issue hasn’t been addressed at all. Other times, a full repeal has seemed to be on the table.

What this controversial tax provision does is let certain taxpayers deduct their aggregated state and local taxes when it comes time to do their federal tax return. In 2017, Republicans capped the previously limitless deduction at $10,000 as part of the Tax Cuts and Job Act. The move was seen by many as a punitive move to hurt blue states, many of which have the highest local tax rates in the U.S.

Democrats have since mulled various ideas to roll that back and House Democrats have now largely rallied around one idea in the latest version of the Build Back Better Act. But few expect that to be the last word even if House Democrats move on the issue – and the larger bill – during the week of Nov. 15.

What’s in the bill (for now)

The current proposal, agreed to in an amendment late last week, would increase the cap from $10,000 to $80,000 through 2030. The $10,000 limit would then return in 2031. It was a last-minute tweak on a somewhat similar proposal to increase the cap to $72,500 for five years.

The effort has been led by blue state lawmakers who’ve made “No SALT, No Deal” into a mantra. As the negotiations were winding down last week, some of those lawmakers released a statement saying the approach “will effectively eliminate the undue burden for nearly all of the families in our districts who’ve been unfairly double taxed for the last four years.”

The Tax Foundation estimates that the revised plan would cost about $298 billion through 2025 but then raise money from 2026 through 2031 – on net compared to current policy – given that the cap is currently set to expire completely in 2026. It would lead to “a net revenue increase of $16.4 billion,” they said. Other experts have noted the SALT cap it would still be regressive with the benefits going almost exclusively to the richest Americans.

Republicans have lined up squarely against the idea of touching the SALT cap at all. Rep. Kevin Brady (R., Texas), an architect of the 2017 Tax Cuts and Job Act, recently told Yahoo Finance, "it's a bit hypocritical” for Democrats to raise the limit on deductions because it would provide little tax relief for the middle class. Brady said the move means lower-tax states (like his state of Texas) “essentially subsidizes high-tax states.”

Rep. French Hill (R., Ark.) added his opposition in another Yahoo Finance interview: It “really only benefits high-income taxpayers in California, New Jersey, and New York."

Another idea from the Senate

Even if House Democrats pass their idea for SALT relief, it will still likely face changes in the Senate.

Sen. Bernie Sanders (I., Vt.) has been a SALT critic and recently called the House Democratic idea “not an acceptable compromise.” Sanders has proposed, alongside Sen. Robert Menendez (D., N.J.), removing the cap, but only for some tax filers.

“We should eliminate that cap for families making $400,000 or less, not for millionaires and billionaires, and we should make that permanent,” Sanders said at a press conference.

House Democrats have tried to push back on the Sanders/Menendez plan. Rep. Tom Malinowski (D., N.J.) is one of the authors of the House plan and recently told Roll Call that the idea may not work as intended, citing Amazon founder Jeff Bezos as an example.

"One challenge with an income cap is that if you're Jeff Bezos, your income was $86,000 last year, so it may not achieve what they're trying to achieve," Malinowski said.

Budget experts have also noted that the plan would still benefit few middle-class Americans, who often aren’t eligible for SALT relief anyway. Marc Goldwein of the Committee for a Responsible Federal Budget recently wrote “these modifications can’t turn a bad policy into a good one.”

What’s ahead

Democrats hope to iron out the remaining issues in the overall Build Back Better bill in the next few weeks. The process in the Senate includes the so-called “vote-a-rama” procedure that allows every senator to offer amendments. That means senators like Sanders and Menendez could propose their SALT idea. It also means the senators who back a full repeal of the SALT cap could jump in and try and remove the cap entirely.

Both of New York’s senators have pushed for a full repeal of the cap this year. The more recent idea from Senate Majority Leader Chuck Schumer is to completely lift the SALT cap for the next five years and shift back to the $10,000 cap in 2026.

Critics of getting rid of the SALT deduction aren’t taking for granted that a full repeal is now off the table. Jason Furman, former chair of President Obama’s Council of Economic Advisors, recently called the idea of a full repeal “obscene.”

My guess is the majority of Americans with a net worth of $50 to $300 million would get a tax cut under the Build Back Better plan with a full repeal of SALT.

The bill would do more for the super-rich than it does for climate change, childcare or preschool.

That's obscene.

— Jason Furman (@jasonfurman) November 2, 2021

Multiplestudies have found the benefits of a complete SALT restoration would almost exclusively go to the rich. According to the Tax Policy Center, 16% of tax filers with income between $20,000 and $50,000 claimed the SALT deduction in 2017, compared to 76% for tax filers with income between $100,000 and $200,000, and over 90% of tax filers with income over $200,000. Tax filers with income above $100,000 were 18% of all tax filers, but accounted for about 78% of the total dollar amount of SALT deductions reported. The center estimates a full repeal of the SALT cap would lead to almost 70% of the money going to tax filers with incomes above $500,000.

Sanders has also lashed out at the idea but many Democratic leaders like Speaker Nancy Pelosi – as well as moderate Democrats who are now on board with the SALT compromise – have previously talked about a full repeal.

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.

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