Democrats with constituents in high-tax areas will feel pressure to vote for a measure to expand federal deductions for state and local taxes paid, but the bill is also in tension with longtime Democratic tax priorities because it would mainly benefit the wealthy.
The bill, a modified version of Rep. Mike Lawler’s (R-NY) SALT Marriage Penalty Elimination Act, changes the $10,000 cap on SALT deductions by doubling it for married joint tax filers. The Rules Committee last week reported out a rule to allow for consideration of the bill on the floor.
A mere 1.3% of the tax relief would accrue to those earning under $100,000 annually, while 56% of the bill’s benefits would go to those earning in excess of $250,000, according to the Tax Foundation.
Most taxpayers earning under $100,000 per year would not stand to benefit because they would generally take the standard deduction rather than itemizing deductions like those for SALT.
That puts Democrats in a pickle because many represent districts in places with high taxes and thus might feel pressure from their donors with deep pockets to vote in favor of the bill. At the same time, Democrats are largely proponents of progressive taxation, meaning they favor higher taxes on higher incomes.
Democrats are “typically skeptical of tax cuts for high earners, and so that’s an ongoing tension there,” said Joshua McCabe, the director of social policy at the Niskanen Center. More liberal members of the Democratic caucus, he said, are closely attuned to the distributional tables for the benefits of the tax break.
For instance, Sen. Bernie Sanders (I-VT) has publicly opposed past Democratic pushes to change the SALT cap.
“At a time of massive income and wealth inequality, the last thing we should be doing is giving more tax breaks to the very rich,” he said of a measure to ease the SALT cap in 2021.
Influential liberal think tanks like the Institute on Taxation and Economic Policy have also opposed repealing the SALT cap, given that it would largely benefit the highest earners and make the tax code less progressive.
Many Republicans are also opposed to raising the SALT cap, arguing that SALT deductions subsidize state and local government spending. So the legislation would require Democratic support to pass in the House, and if it even makes it out of the House, it faces uncertain odds in the Senate.
“This will I think be a big test for us because we have not seen a House floor vote on this issue in many years,” Garrett Watson, a senior policy analyst at the Tax Foundation, told the Washington Examiner. “If anything, that will test out — what is the depth of support for this? Or are folks overwhelmingly against it? That will be the thing to watch.”
Raising or eliminating the SALT cap is a major issue in some blue and swing districts, especially in states like New York and California.
Adding to the challenges, the Penn Wharton Budget Model, calculated at the University of Pennsylvania’s business school, concluded that the legislation would reduce tax revenue by $12 billion over the 10-year budget window, with all the lost revenue falling in fiscal 2024.
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The federal deduction for SALT was capped at $10,000 by the 2017 Republican tax overhaul. Lawler’s bill would raise the deduction to $20,000 for married couples who own a home and file jointly. The increased threshold would apply to joint filers whose adjusted gross income is less than $500,000.
The expected separate vote on SALT came about because centrist Republicans from New York were upset that a change to the SALT cap was not included in the broader child tax credit and business tax bill and threatened to tank an unrelated procedural vote in protest. To appease them and get their votes, House leadership allowed the SALT sidecar bill to proceed.
