Democrats struggle with repeal of key Trump tax provision

House Democrats are grappling with how to address one of their least favorite provisions in the GOP tax law: the $10,000 cap on the deduction for state and local taxes (SALT).

A House Ways and Means Committee subpanel held two hearings on Tuesday about the SALT deduction cap, during which local-government officials and House members argued that the cap hurts residents and communities in their districts.

The hearings come after committee Democrats formed a working group to discuss the issue earlier this year. And lawmakers have offered a host of bills to increase the cap or repeal it all together.{mosads}

But there are challenges to undoing the cap, since doing so would lower federal revenue and would largely benefit high-income people.

The cap is “the wrong policy, and we need to find a workable solution,” said Ways and Means Committee Chairman Richard Neal (D-Mass.).

Democrats’ efforts to highlight the SALT deduction cap and discuss ideas to undo it come after the 2018 midterm elections, when the cap was a campaign issue in a number of key House races.

Many of the House Democrats who testified before the subcommittee were freshmen lawmakers who replaced Republicans in suburban districts in blue states. Rep. Lee Zeldin (R.N.Y.), one of the few House Republicans who voted against the tax law, also testified to raise concerns about the cap.

While several Democratic presidential candidates have co-sponsored legislation to repeal the SALT deduction cap, the cap has been a less prominent issue in the 2020 presidential race than it was in the midterms. Candidates have focused more on other tax issues, such as raising taxes on the very rich and expanding tax credits for low- and middle-income people.

Legislation to undo the cap is unlikely to become law this year, since it would be opposed by the Republican-controlled Senate. But Democrats also have yet to come to a consensus on what legislation they would want to take up in the House.

Targeting the SALT cap could also be politically risky for Democrats. Supporters of the tax law have painted Democrats as trying to help high-income voters in blue states.

A major challenge to addressing the SALT deduction cap are analyses that estimate repealing the cap would add to the deficit and largely benefit high earners.

The Joint Committee on Taxation (JCT), Congress’s tax scorekeeper, estimated that for 2019 restoring the SALT deduction would reduce federal tax liability by $77.4 billion, and that more than half of this reduction would go to people with incomes of at least $1 million. JCT estimated that 99 percent of the tax cut would go to people with income of at least $100,000.

Rep. Lloyd Doggett (D-Texas) said that if Congress isn’t willing to fully offset the cost of repealing the SALT deduction cap, “then we have to find other reforms in this provision to assure we do it in a fiscally responsible way.”

He suggested that undoing the GOP tax law’s cuts to the corporate tax rate, tax cuts for the wealthy and international provisions could raise revenue to offset the cost of partially or fully undoing the SALT deduction cap.

Doggett criticized the SALT deduction cap but didn’t discount the analyses finding that repealing the provision would largely benefit high-income people.

“I don’t believe we ought to be simply rewarding the people that already got rewarded with the Republican tax law with yet another tax reduction,” he said.

Several Democrats suggested that Congress could raise the top individual tax rate, which was cut from 39.6 percent to 37 percent in the GOP tax law, while repealing the SALT deduction cap. 

Rep. Bill Pascrell (D-N.J.) has a bill that would raise the top individual tax rate to 39.6 percent while restoring the full SALT deduction. His office on Tuesday released a JCT estimate finding that the increase in the top individual rate would pay for about one third of the cost of repealing the SALT deduction cap.

Pascrell called the idea that the deduction is for the rich “100 percent poppycock.”

Pascrell and others from high-tax areas are pressing Congress to act.

Many Democrats on the committee, and many of the local-government officials who testified, said that people in their communities hurt by the SALT deduction cap may have high incomes, but they also have high costs of living.

“It’s not reasonable to expect to pay a teacher in New York what a teacher in Mississippi earns—the gross income of the average Mississippi teacher is about the same as the median price of rent in New York,” said Rep. Mike Thompson (D-Calif.), chairman of the Ways and Means Subcommittee on Select Revenue Measures, which held Tuesday’s hearings.

Bob De Natale, the mayor of Bayville, N.Y., displayed a picture of a home in his community that is listed for about $900,000. 

“They are nowhere near palatial residences,” said De Natale, who said he voted for President Trump in 2016. 

Later, Rep. Don Beyer (D-Va.), who represents Washington D.C. suburbs, displayed a photo of a home in his district and a “nicer” home South Carolina that cost significantly less.

He said that depending on where people live, they can have dramatically different tax rates that have nothing to do with their “richness.”

Democratic lawmakers and local government officials also said that the cap on the SALT deduction could hurt state and local governments’ ability to offer services — such as schools and police and fire services — that benefit people across the income spectrum.

“One of the things that all of you have brought up is that that cap is impacting services and communities, and how critical it is. People are looking for these services in their day-to-day life,” Rep. Suzan DelBene (D-Wash.) said to the local-government representatives who testified.

Thompson said that there are a lot of issues related to the SALT deduction cap that deserve to be explored. 

These include the SALT deduction providing flexibility to state and local governments and that the cap on the SALT deduction “enacts a massive marriage penalty,” because the limit is $10,000 for both single filers and married couples filing jointly. Thompson also expressed concerns that the cap, along with the GOP tax law’s standard deduction, creates disincentives for homeownership and charitable giving.

Most Republicans at Tuesday’s Ways and Means Committee hearings defended the SALT deduction cap.

Rep. Tom Rice (R-S.C.) expressed concerns that undoing the SALT deduction cap would end up raising taxes in lower-income rural counties in his district.

“Somebody’s got to pay the taxes,” he said.

Republicans also argued that their tax law lowered people’s taxes overall and is boosting the economy.

“Even with the SALT cap in place, most families have lower overall federal tax bills now than they did prior to [the Tax Cuts and Jobs Act], said Rep. Adrian Smith (R-Neb.), the top Republican on the subcommittee that held the hearings.