Democrats have a growing tax problem with SALT

A growing number of House Democrats are threatening to withhold support from President Biden’s $3 trillion infrastructure proposal over a tax provision affecting state and local taxes.

Democrats from high-tax blue states are insisting on the repeal of a rule that limits state and local tax (SALT) deductions to $10,000, which was enacted as part of the 2017 tax law signed by President Trump to help offset the cost of some of the tax cuts in the package.

Reps. Thomas Suozzi (N.Y.), Bill Pascrell (N.J.) and Josh Gottheimer (N.J.) on Tuesday issued a joint statement vowing to oppose any efforts to change the tax code unless the SALT deduction is restored.

The issue could prove to be a serious stumbling block for House Democrats, who can only afford three defections with their razor-thin majority and still pass legislation on their own without any GOP support. 

“No SALT, no deal,” Suozzi told The Hill.

Democrats from states hit hardest by the SALT cap have been pushing for the repeal ever since its enactment, arguing that it hurts middle-class taxpayers, encourages people to move to other states and thereby threatens states’ tax revenue.

“It’s a body blow to my entire state. It’s an existential issue. People are leaving my state because of the cap on the SALT deduction and it’s only been exacerbated by the coronavirus. And when people leave the state because they lost the SALT deduction, then moderate-, low-income [taxpayers] and the rest of us are left behind holding the bag,” Suozzi said.

“Which means either our taxes are going to go up or our services are going to get cut. And neither of those are a good alternative for us.” 

The SALT issue is rearing its head after years of efforts eliminate the cap. In late 2019, House Democrats — joined by five Republicans — passed a bill to temporarily get rid of the SALT cap. 

Its repeal was also included in House Democrats’ COVID-19 relief bill last year. Democrats pushing for the SALT cap repeal opted against drawing a red line in negotiations over the $1.9 trillion stimulus package that Biden signed into law earlier this month.

But now they’re laying down a marker as Biden prepares to unveil the first part of his infrastructure plan on Wednesday in Pittsburgh.

The plan, which will focus on physical infrastructure such as roads, bridges, ports, airports, telecommunications and manufacturing, with a heavy emphasis on tackling climate change and building out green infrastructure, is expected to cost upward of $2 trillion. Another plan focusing on “social infrastructure” such as child care and early education is expected to cost upward of $1 trillion.

White House press secretary Jen Psaki said Monday that Biden would propose ways to pay for the entirety of the physical infrastructure plan.

Potential options include increasing the corporate tax rate from 21 percent to 28 percent, upping the top income tax level from 37 percent to 39.6 percent, boosting taxation on corporate profits earned abroad, taxing capital gains as ordinary income for the wealthy and changing tax rules around inheritance. 

Transportation Secretary Pete Buttigieg said it would not include a gas or mileage tax, which had been floated in recent days.

Estimates for repealing the SALT cap range from $185 billion to $673 billion over a decade, meaning its inclusion would require that much more in offsets to pay for the bill.

Maya MacGuineas, president of the Center for a Responsible Federal Budget, said the move would amount to a $40,000 annual tax cut for millionaires and billionaires, nearly as much as the estimated $51,000 they got from the Trump tax reform.

“Getting rid of the SALT cap is really one of the more regressive tax cuts we could think about. I don’t know why it’s on the table. It would leave huge — huge annual tax cuts for millionaires and billionaires,” she testified at a Senate Budget Committee hearing on tax policy last week.

But lawmakers from blue states that tend to have higher state and local taxes say the cap makes it harder for them to raise revenues, hitting their residents with higher tax bills.

Eleven members of the House Ways and Means Committee sent a letter to Biden in late February asking for a meeting to discuss repealing the cap on the SALT deduction. The Democrats, from a variety of high-tax blue states, who signed the letter are Pascrell, Suozzi, Mike Thompson (Calif.), John Larson (Conn.), Danny Davis (Ill.), Earl Blumenauer (Ore.), Brian Higgins (N.Y.), Judy Chu (Calif.), Brad Schneider (Ill.), Jimmy Panetta (Calif.) and Jimmy Gomez (Calif.). 

“Although restoration of the uncapped SALT deduction is frequently cast as tax relief for the wealthy, in our districts, it is a middle-class priority. The capped SALT deduction discourages middle-class homeownership and charitable contributions, and it adds to the pressure on our state and local governments to make cuts to education, health services, public safety, and other community needs just when our constituents are suffering the most,” the lawmakers wrote in the letter obtained by The Hill. 

But critics of eliminating the SALT deductions say it has no place in the infrastructure plan. Not only does it primarily benefit the wealthy, they argue, but it also would add to the plan’s cost rather than paying for roads, bridges, airports and broadband.

That puts centrist Democrats, budget hawks and even progressives in uncomfortable positions.

“There are some members that feel very strongly about it because they’re in a state where that’s a very big issue for their revenue,” said Rep. Pramila Jayapal (D-Wash.), chairwoman of the Congressional Progressive Caucus (CPC).

While the CPC is not planning to take a formal position on the matter, Jayapal emphasized that progressives are focused on increasing taxes on the wealthy to help pay for the infrastructure plan.

“I will just say that our focus in terms of the revenues is bringing fairness to the tax system,” Jayapal said when asked about the effort to expand the deduction.

Whichever way the House proceeds on the issue, Democrats will still face problems across the Capitol, where Senate Majority Leader Charles Schumer (D-N.Y.) has been a major proponent of eliminating the cap, despite misgivings from centrists in the caucus.

Those same centrists have also called for Biden to pursue the infrastructure bill on a bipartisan basis, negotiating out a deal that would win over at least 10 Senate Republicans, who are vehemently opposed to reversing the SALT cap.

Psaki said that Biden would include his list of revenue proposals on Wednesday, when he gives the details of the plan, but added that he was open to engaging with Congress on how to cover the costs.

“If they share a goal of building our infrastructure for the future but don’t like the way he’s going to propose to pay for it, we’re happy to look at their proposals,” she said. 

“If they don’t want to pay for it, I guess they can propose that too,” she added.