Senate Majority Leader Charles Schumer (D-N.Y.) and Speaker Nancy Pelosi (D-Calif.) face an uphill battle on one of their top tax priorities, repealing the cap President Trump put on deducting state and local taxes.
Capping the SALT deduction, as it’s known, at $10,000 was Trump’s way of getting blue states with high state and local tax rates — principally New York and California — to pay for a big chunk of his 2017 Tax Cuts and Jobs Act.
Schumer said getting rid of Trump’s cap would be one of his highest priorities as majority leader and Pelosi has called the cap on deductions “devastating” for California taxpayers.
But getting it done with extremely small Democratic majorities in the Senate and House is turning into a major headache and at this point it looks like leaders may have to settle for lifting the cap instead of getting rid of it entirely.
“I think there are far better ways to spend our money,” Sen. Michael Bennet (D-Colo.) said when asked about repealing the cap on SALT deductions.
Democratic policy experts predict that Schumer and Pelosi will now focus on a compromise to partially lift the SALT cap instead of repealing it altogether.
“I expect they’re going to have to do something on SALT to satisfy some very important members in Blue States but I think it’s just going to be a partial return,” to the deduction that existed before the 2017 tax law, said Jim Kessler, a former Schumer aide and executive vice president for policy at Third Way, a centrist Democratic think tank.
“It’s a lot of revenue,” he added
Other moderate Democrats are lukewarm on the idea.
“Of various priorities of mine that is not a top priority,” said Sen. Tim Kaine (D-Va.).
Sen. Chris Coons (D-Del.), a close ally of President Biden, said it’s not at the top of his list either.
“That is a complex fiscal policy issue I have not spent a lot of time thinking about. You might expect me to be passionate about it because I’m from the mid-Atlantic but it is actually far less of a pressing issue in Delaware than it is in New Jersey or New York,” he said, noting that Delaware has “dramatically” lower state and local taxes than New York.
The biggest blow against adding language repealing the SALT cap deduction in any budget reconciliation bill that may pass with a simple-majority vote came from Senate Budget Committee Chairman Bernie Sanders (I-Vt.).
Sanders, who has jurisdiction over budget reconciliation, said restoring the SALT deduction, which overwhelmingly benefits the nation’s highest income earners, blows a hole in Democrats’ messaging on taxes.
“It sends a terrible, terrible message when you have Republicans telling us that this is a tax break for the rich,” Sanders told Axios in an interview.
“You have got to make it clear which side you are on — and you can’t be on the side of the wealthy and powerful if you’re going to really fight for working families,” he said.
Rep. Alexandria Ocasio-Cortez (D-N.Y.), a leading progressive voice in New York who didn’t rule out a primary challenge against Schumer, last month called the SALT deduction a “giveaway to the rich” and “a gift to billionaires.”
“I don’t think we should be holding the infrastructure package hostage for a 100-percent repeal of SALT,” she said.
She was referring to Democrats from New York and New Jersey who are threatening to vote against an infrastructure package that doesn’t repeal the SALT cap.
“No SALT, no deal,” Rep. Thomas Suozzi (D-N.Y.) told The Hill earlier this year.
Intra-party tensions over the expensive tax break are a problem given that Schumer and Pelosi have extremely narrow vote margins to work with. The Senate is evenly divided 50-50 and the Democrats have only a four-seat majority in the House.
Other progressives warn it’s a messaging nightmare for Democrats to push an expensive tax break that hardly benefits middle-class voters after years of criticizing Republicans for endorsing tax breaks that disproportionately help the rich.
“Trying to bring back the SALT deduction is to put Democrats on the side giving the affluent a huge tax cut and that makes no sense at this point,” said Robert Borosage, co-founder of Campaign for America’s Future, a liberal advocacy group.
The Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, published an analysis last month that found restoring the SALT deduction would provide no benefit to 96 percent of middle-income households earning between $52,000 and $93,000 annually. The four percent of middle-income households that would benefit would receive an average tax cut of $400.
The analysis found that 93 percent of households earning $1 million or more would get a tax cut averaging about $48,000.
Howard Gleckman, who authored the analysis, says a SALT cap repeal would “overwhelmingly benefit the highest income people.”
Its distribution of benefits is the mirror opposite of a proposal to extend the child tax credit that was in the American Rescue Plan, which is competing for inclusion in the Democrats’ tax reform package.
“It has very different effects on very different people. The expansion of the child tax credit enacted by Congress recently really is focused on low- and moderate-income people,” he said.
Gleckman said repealing the SALT cap would cost the U.S. Treasury about $185 billion over five years. But he said it would cost closer to $600 billion over ten years.
He said the projected cost that some SALT-deduction advocates in Congress are circulating “is not really a 10-year number.”
“If you extend it … then it would close to about $600 billion over ten years,” he noted.
Restoring the SALT deduction would cost more than the amount of revenue that the federal government would collect if it raised the corporate tax rate from 21 percent to 25 percent, a target proposed by Sen. Joe Manchin (D-W.Va.). Manchin estimates raising the corporate rate by four percentage points would collect about $400 billion in revenue.
“The amount that they could raise by raising the corporate rate from 21 to 25 would more or less pay for the cost of repealing the SALT cap,” Gleckman said.
But that would then leave a gaping hole in the plan to finance Biden’s $4 trillion infrastructure package, including $425 billion proposed for expanded childcare and prekindergarten.