House Approves SALT Cap Rollback

House Approves, 218 - 206, SALT Cap Rollback

• Bill would raise SALT cap for 2019, repeal it for two years
• Measure heads to House floor where passage is expected

The bill would reduce or eliminate the existing $10,000 cap on federal tax deductions for state and local taxes, which was established under the 2017 tax law, for tax years 2019 through 2021. Specifically, it would double the cap to $20,000 for married couples filing a joint tax return for tax year 2019, and it would eliminate the cap for tax years 2020 and 2021. As amended, the bill would retain the cap for taxpayers whose adjusted gross incomes exceed $100 million in a taxable year. As an offset, the bill would increase the top individual income tax rate from 37% to 39.6% and it would reduce the corresponding income thresholds at which the top tax bracket applies. The bill would also permanently increase from $250 to $1,000 a tax deduction for professional development costs for elementary and secondary school teachers, and it would establish a new tax deduction of up to $1,000 for first responders, including for costs associated with related professional development courses..

The changes would largely benefit residents of high-tax states, such as New York, New Jersey and California. The bill offers a short-term fix for what Democrats see as one of the most politically motivated portions of the Republicans’ 2017 tax law.

Key senators in the Republican-led Senate have already said they won’t take up the legislation, which would roll back significant portions of the 2017 tax overhaul. Democrats have proposed to pay for the legislation by raising the top tax rate back to 39.6% and lowering the income thresholds at which that level applies.

After 2021, the SALT cap would revert to $10,000, but the higher tax rates would stay in effect. Those are set to expire in 2026.

Republicans have accused Democrats of pursuing tax law changes that would benefit the wealthy at a time that the party’s presidential candidates are campaigning on messages of increasing taxes for the highest earners.

This is a “huge tax cut for millionaires and billionaires, while the middle class gets zero,” said Representative Kevin Brady, the top Ways and Means Committee Republican.

Democrats say the SALT deduction helps middle-class taxpayers in high-cost areas, such as New York and San Francisco, where property values and local taxes tend to be higher.

“We are increasing the top marginal rate in order to make sure it’s relatively neutral when it comes to the wealthy homeowners,” said Representative Ron Kind, a Wisconsin Democrat. “So that’s kind of an elegant solution to the concern about distribution with all this.”

Representative Stephanie Murphy, a Florida Democrat on Ways and Means, is among a handful of Democrats in the House who oppose the change. Florida residents weren’t hurt as much by the SALT cap because the sunshine state doesn’t have a state income tax. However, Florida residents would have to pay the higher income rates included in the law.

Business groups have already begun mobilizing to oppose the SALT changes, saying the higher top tax rate will harm more taxpayers than the larger SALT deductions help. In particular, some pass-through businesses, companies where the owners pay the business taxes on their personal tax returns, say the legislation could harm them.

“While this SALT relief will benefit some pass-through businesses, those savings will be reserved only for business residing in certain states, while the tax hike will apply to businesses in all 50 states,” said Parity for Main Street Employers, a group that advocates for pass-through businesses.

The bill would also increase deductions for elementary and secondary school teachers and for government emergency workers. The expanded tax breaks, netted with the revenue from the higher income tax rate, would raise about $2.4 billion over a decade, according to the congressional Joint Committee on Taxation.