Lower refunds amplify calls to restore key tax deduction

Complaints about lower refunds and higher taxes are amplifying calls from Northeast and West Coast leaders to do away with the GOP tax law’s limit on the deduction for state and local taxes.

The limit on the tax break, known as the SALT deduction, has been one of the most controversial provisions of the tax law, with lawmakers from both parties in high-tax states such as New York and New Jersey arguing that the deduction cap unfairly punishes their voters. 

A group of Democratic governors held a press conference on Friday to press Congress to restore the full SALT deduction.

{mosads}”It is appropriate that we’re having this discussion in the middle of tax season as [the deduction cap] is gutting our middle class and it’s just plain wrong,” said New Jersey Gov. Phil Murphy.

The governors’ press conference comes after New Jersey Democrats Rep. Bill Pascrell and Sen. Bob Menendez earlier this month introduced a bill to restore the full SALT deduction. It’s one of several bipartisan bills that lawmakers have introduced this year to restore the full SALT deduction, and it has the backing of a number of lawmakers in the Northeast, Illinois and California, including Rep. Chris Smith (N.J.), one of the few House Republicans who voted against the 2017 law and remains in office.

In an op-ed for The North Jersey Record on Friday, Pascrell and Menendez called the SALT deduction cap “a main culprit for the tax sticker shock in New Jersey and other high cost-of-living states.” 

The tax reform package that President Trump signed in December 2017 capped the SALT deduction at $10,000. Republicans decided to limit the deduction because they thought the tax break was subsidizing higher state taxes and because limiting it could raise revenue to help pay for tax cuts elsewhere in the new law.

But the new cap faced strong opposition from a bipartisan group of lawmakers in high-tax states. Several House Republicans from New York, New Jersey and California joined Democrats in voting against the measure.

Most taxpayers, even in high-tax states, are expected to receive a reduction in their tax liability. For some taxpayers, the limit on the SALT deduction will be more than offset by other changes in the 2017 law, such as lower rates and a larger child tax credit. Additionally, some taxpayers previously had their SALT deduction curbed by the alternative minimum tax but will no longer be subject to that tax.

But taxpayers who relied heavily on the SALT deduction in the past may also be among those most upset during filing season.

IRS data from the first three weeks of this year’s filing season showed a decline in the average refund. Experts with major tax preparation companies said that homeowners in high-tax states may be among those seeing smaller refunds if they didn’t adjust their tax withholding this year because their amount of deductions may have declined.

The size of someone’s refund and their tax liability are two separate issues. Those with smaller refunds did not necessarily get a tax increase, but instead may have just had their taxes withheld from their paychecks more accurately throughout the year.

However, in a more significant development, some taxpayers who previously relied heavily on the SALT deduction may actually be seeing an increase in their tax liability for 2018 due to the $10,000 cap. 

Rep. John Larson (D-Conn.), a senior member of the House Ways and Means Committee, said that, because of the cap, some people in his state “are finding as they’re doing their filings that they’re ending up paying more” during the first filing season under the new law.  

{mossecondads}The Urban-Brookings Tax Policy Center said in a report last year that the states where the greatest number of households will see a tax increase for 2018 are several Northeastern states and California. More than 9 percent of households in Maryland and New Jersey will see an increase due to the major individual provisions in the GOP tax law, compared to an average for all states of around 6 percent.

Members of Congress from blue states said they’ve been hearing complaints about the SALT deduction cap and are giving attention to efforts to undo it.

The cap is poised to get more attention this year in part because Democrats now control the House. New House Ways and Means Committee Chairman Richard Neal (D-Mass.) has made hearings on the 2017 tax law one of his top priorities, and the SALT deduction cap could be the subject of one of those hearings.

New York Gov. Andrew Cuomo (D) said Friday that the SALT deduction issue is on the radar of House Speaker Nancy Pelosi (D-Calif.).

“It has to be a top priority for the Democratic Congress,” he said. “It was a terrible political injustice that was done. It will hurt millions of people.”

The White House has expressed some openness to reconsidering the cap on the deduction, with Trump telling reporters earlier this month that he was “open to talking about” it.

But key congressional Republicans remain strongly opposed to revisiting the cap.

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) said that lawmakers who want to repeal the SALT deduction cap appear to be “intellectually dishonest,” because they criticize the GOP law for being a tax cut for the rich but also want to restore a break that helps high earners.

Rep. Tom Reed, a New York Republican on the Ways and Means Committee who voted for the tax law, tweeted on Friday that the cap would be a nonissue in New York if Cuomo focused on cutting taxes and spending.

But lawmakers who oppose the SALT deduction cap argue that many of the people hurt by it are middle class, even if they live in six-figure households, because they live in high-cost areas.

“These are hard-working homeowners, often with families and college debt and high taxes and high mortgages and high utility costs, and now this is adding to their burden,” said Rep. Tom Suozzi (D-N.Y.), a Ways and Means Committee member whose Long Island and Queens-based district had the highest percentage of taxpayers claiming the SALT deduction in 2014. 

Pascrell and Menendez aimed to prevent their bill from being a boon to the wealthy by also including a provision in their legislation to raise the top individual tax rate from 37 percent to its pre-tax law level of 39.6 percent.

It’s highly unlikely that the SALT deduction cap will be repealed in the next two years, given the opposition to doing so in the Republican-controlled Senate. But that isn’t going to stop Democrats in blue states from trying.

Menendez said at a news conference earlier this month that the House could pressure the Senate to act, and that Trump could be an asset if he’s seriously interested in revisiting the deduction cap. He also suggested that Democrats could try to repeal the SALT deduction cap in negotiations with Republicans over making technical corrections to the 2017 tax law sought by the GOP.

“These are all leverage points at the end of the day [that] I believe could make it happen,” Menendez said.

— This report was updated at 11:06 a.m.