Senate rejects Dem measure to overturn IRS rules on SALT deduction cap

The Senate on Wednesday rejected a Democratic effort to overturn IRS regulations blocking workarounds to a portion of President Trump’s tax law that is disliked by high-tax states.

The Senate voted against the Democrats’ resolution, introduced by Minority Leader Charles Schumer (D-N.Y.), by a vote of 43-52. It was a mostly party-line vote, with Sen. Michael Bennet (Colo.), a 2020 presidential candidate, the only Democrat to vote against the resolution and Sen. Rand Paul (Ky.) the only Republican to vote in favor.

Among those not voting were Sens. Kamala Harris (D-Calif.), Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.), all 2020 contenders.

While Democrats’ effort was unsuccessful, it is notable because it’s the first time they forced a vote to overturn IRS rules relating to Trump’s tax law. The vote highlights how Democrats from high-tax states — such as New York, New Jersey and California — view the tax law’s cap on the state and local tax (SALT) deduction as a top priority and the challenges they face in doing away with it.

“As bad as the Trump tax bill is for the whole country, it’s even worse for states like New Jersey,” Sen. Bob Menendez (D-N.J.) said on the Senate floor ahead of the vote.

{mosads}The tax law Trump signed in December 2017 imposed a cap on the SALT deduction of $10,000. 

Republicans capped the deduction in order to raise revenue to pay for tax cuts elsewhere in the law, and because they viewed the deduction as subsidizing higher state taxes. They have noted that analysts have estimated that most people got a tax cut for 2018 under Trump’s law, even in high-tax states.

Efforts to repeal the SALT deduction cap have also faced criticism among progressives, because analysts across the ideological spectrum have estimated that repealing the SALT deduction cap would primarily benefit high-income taxpayers.

But the cap has been one of the most controversial portions of the GOP tax law, with policymakers in some blue states arguing that it unfairly punishes their residents with high property taxes and will make it harder for their states to offer public services to their residents.

Several GOP House members from New York, New Jersey and California joined with Democrats in voting against the tax law due to concerns about the SALT deduction cap, though no GOP senators hail from those states and no Republican senator voted against the final version of the 2017 law.

In the 2018 midterm elections, Democrats flipped a number of House seats in affluent, suburban areas where residents had relied heavily on the SALT deduction before the GOP tax law was enacted, though the tax law wasn’t the only factor, or necessarily the driving factor, behind Democrats’ victories in those districts.

The Senate vote centered on nullifying Treasury Department and IRS rules, finalized in June, that blocked certain workarounds that blue states created to allow their residents to circumvent the SALT deduction cap. The Congressional Review Act allows Congress to vote to nullify recently finalized regulations, and senators can force a vote on resolutions under the act with the signatures of 30 members of the chamber.

Several states tried to allow residents to convert state and local taxes into charitable contributions that would still be fully deductible on federal tax returns. States authorized the creation of state and local funds that taxpayers could make donations to and receive credits against their state and local taxes.

The IRS’s rules are designed to prevent the donation-and-credit programs from being used as workarounds to the SALT deduction cap. Under the rules, taxpayers can only claim a charitable deduction for donation amounts that exceed the amount of state tax credits they received.

Democrats in high-tax states have blasted the rules as harmful to their residents. They also encouraged Republicans to join them in voting to overturn the rules, pointing out that the rules also affect donation-and-credit programs in red states that pre-date the GOP tax law.

“The regulation we will be voting on impacts state charitable credits in virtually every state — ranging in areas from education to conservation to child care and more,” Schumer said Tuesday.

But Republicans defended their tax law and blasted Democrats for focusing on making a change to the law that would help high earners.

“Rather than acknowledge that the sky hasn’t fallen, our Democratic friends still want to undermine tax reform,” Senate Majority Leader Mitch McConnell (R-Ky.) said Wednesday. “Listen to this. Democrats’ first target is changing the tax code so that working families across the country have to subsidize wealthy people in states like New York, New Jersey and California.”

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) called the blue states’ workarounds “state-sanctioned tax shelters.”

One Democrat took issue with the resolution to overturn the IRS rules.

Bennet on the Senate floor Tuesday called Trump’s tax law “completely misguided” and argued that the Trump administration designed the SALT deduction cap as revenge on people who didn’t vote for the president in 2016. And he called the IRS rules overly broad regulations that harmed programs that existed before the tax law was enacted. But he also said that voting to overturn the IRS rules would make Trump’s tax law worse.

“Let me be very clear: The vast majority of the benefits of repealing the SALT cap would go to high-income Americans,” Bennet said. “Repeal would be extremely costly. And for that same cost, we could finance much more worthy efforts to help working- and middle-class families all over the country.”

Democratic lawmakers representing high-tax jurisdictions have said that even if their constituents who are hurt by the SALT deduction cap have high incomes, they are still middle class because they face a high cost of living.

In the House, Democrats are also wrestling with how to address the SALT deduction cap. The House Ways and Means Committee held hearings on the topic in June, and lawmakers have formed a working group to come up with consensus legislation on the issue.

Rep. Mike Thompson (D-Calif.), the leader of the working group and a senior member of the Ways and Means Committee, said Tuesday that the group is drafting legislation that he hopes will get a committee vote by the end of the year.

“We’re going to write legislation that’s paid for and legislation that addresses this mess that the Republican tax bill created,” Thompson said.

Rep. Bill Pascrell (D-N.J.), another Ways and Means Committee member, suggested on Tuesday that the bill could involve increasing the cap from $10,000 to $25,000 or $30,000, but not totally repealing the cap. He suggested that the bill could be paid for by raising the top individual income tax rate.

Rohit Kumar, a former McConnell aide who now works at PricewaterhouseCoopers, said the work House and Senate Democrats are doing now on the SALT deduction is largely about “laying the groundwork” for future negotiations, as well as showing that they’re working to help their constituents.

People who feel that they were hurt by the cap “want to see their elected members fighting for them,” he said.

The SALT deduction cap hasn’t been a prominent issue in the Democratic presidential primary. While some candidates from high-tax states, such as Harris and Sen. Cory Booker (D-N.J.), have supported legislation to restore the full SALT deduction, the issue hasn’t been central to their campaign platforms, and many other candidates have not explicitly spoken about the cap. Harris’ office told The Hill she would have voted for the resolution.

It’s unclear exactly when any changes to the SALT deduction cap will occur.

New York, New Jersey, Connecticut and Maryland sued to challenge the SALT deduction cap, but they lost at the district court level. New York, New Jersey and Connecticut have filed a separate lawsuit challenging the IRS rules that is still pending before a federal district court in New York.

Lawmakers will have a major opportunity to revisit the GOP tax law at the end of 2025, when the SALT deduction cap and the law’s other tax changes to the individual code expire. But a future Democratic president and Congress may want to reexamine the cap and the tax law as a whole sooner than that.

“They’re going to want to replace it with something better before the end of 2025,” said Steve Wamhoff, director of federal tax policy at the left-leaning Institute on Taxation and Economic Policy.

–Updated at 5:09 p.m.