The House's SALT cap rollback is destined to die in Senate

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Legislation that would provide big deductions for taxpayers with high state and local tax bills is gathering momentum in the House this week, but it’s headed into a brick wall in the Senate.

The House Ways and Means Committee Wednesday approved a bill that would raise the state and local tax, or SALT, deduction cap from $10,000 to $20,000 for married couples in 2019 and repeal the limit entirely for 2020 and 2021.

The changes would largely benefit residents of high-tax states, such as New York, New Jersey and California. The bill offers a short-term fix for what Democrats see as one of the most politically motivated portions of the Republicans’ 2017 tax law.

The panel voted 24-17 to advance the legislation. Lawmakers working on the bill say they expect it to go to the House floor next week where it is likely to be passed by the Democratic majority.

Key senators in the Republican-led Senate have already said they won’t take up the legislation, which would roll back significant portions of the 2017 tax overhaul. Democrats have proposed to pay for the legislation by raising the top tax rate back to 39.6% and lowering the income thresholds at which that level applies.

After 2021, the SALT cap would revert to $10,000, but the higher tax rates would stay in effect. Those are set to expire in 2026.

Republicans have accused Democrats of pursuing tax law changes that would benefit the wealthy at a time that the party’s presidential candidates are campaigning on messages of increasing taxes for the highest earners.

This is a “huge tax cut for millionaires and billionaires, while the middle class gets zero,” said Representative Kevin Brady, the top Ways and Means Committee Republican.

Democrats say the SALT deduction helps middle-class taxpayers in high-cost areas, such as New York and San Francisco, where property values and local taxes tend to be higher.

“We are increasing the top marginal rate in order to make sure it’s relatively neutral when it comes to the wealthy homeowners,” said Representative Ron Kind, a Wisconsin Democrat. “So that’s kind of an elegant solution to the concern about distribution with all this.”

Representative Stephanie Murphy, a Florida Democrat on Ways and Means, is among a handful of Democrats in the House who oppose the change. Florida residents weren’t hurt as much by the SALT cap because the sunshine state doesn’t have a state income tax. However, Florida residents would have to pay the higher income rates included in the law.

Business groups have already begun mobilizing to oppose the SALT changes, saying the higher top tax rate will harm more taxpayers than the larger SALT deductions help. In particular, some pass-through businesses, companies where the owners pay the business taxes on their personal tax returns, say the legislation could harm them.

“While this SALT relief will benefit some pass-through businesses, those savings will be reserved only for business residing in certain states, while the tax hike will apply to businesses in all 50 states,” said Parity for Main Street Employers, a group that advocates for pass-through businesses.

The bill would also increase deductions for elementary and secondary school teachers and for government emergency workers. The expanded tax breaks, netted with the revenue from the higher income tax rate, would raise about $2.4 billion over a decade, according to the congressional Joint Committee on Taxation.

— With assistance from Kaustuv Basu

Laura Davison
Bloomberg News
SALT deduction Finance, investment and tax-related legislation Tax deductions State taxes Kevin Brady
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