IRS form. Credit: IRS website.
WASHINGTON—Congress could soon have a chance to restore tax breaks that would especially benefit New Jersey residents, among other states, and the state’s congressional delegation is making sure that everyone on Capitol Hill knows how important the issue is to people in their districts.
The push is to reinstate a federal tax deduction that disproportionately helps Americans living in places where incomes are high, and government spending is too.
For more than a century, taxpayers could deduct the amount they spent on state and local taxes, known as SALT, from the income on which they must pay federal taxes. But a Republican-controlled Congress changed that in 2017, limiting the SALT deduction to $10,000.
“In Bergen County,” says U.S. Rep. Josh Gottheimer, a Democrat, in an interview with States Newsroom, “our median property taxes are over $15,000 a year. So that gives you a sense of why a $10,000 cap actually raises taxes on a majority of my constituents.”
Gottheimer is one of the chairs of the SALT Caucus, a bipartisan group of more than 30 House members that is working to restore the full deduction.
He and U.S. Rep. Bill Pascrell, another New Jersey Democrat, have gone so far to say they won’t support any major changes to the federal tax code—a major priority for President Joe Biden—if they do not reverse the SALT changes.
Or, as Gottheimer likes to say: “No SALT, no dice.”
The ‘summer of SALT’
Meanwhile, U.S. Rep. Mikie Sherrill, another New Jersey Democrat, is putting on a series of events to draw attention to the issue, which she’s calling the “summer of SALT.”
That included bringing Randi Weingarten, the president of the American Federation of Teachers, to her district to join with firefighters, real estate agents and local officials to call for repeal of the cap.
Behind the scenes, Sherrill has met with key lawmakers, including U.S. House Speaker Nancy Pelosi, about the issue. Sherrill has made it widely known among her colleagues that this is one of her top priorities in the upcoming budget negotiations.
“Before the 2017 tax bill that created the cap, 893,000 New Jersey households making under $100,000 a year took the SALT deduction. 77,000 of those households are in my district,” Sherrill said in an emailed statement. “I am confident that we’re well on our way to getting the cap repealed and bringing tax relief to our teachers, first responders, healthcare workers and seniors.”
So far, the best chance to repeal the SALT deduction cap seems to be in legislation that Senate Democrats are preparing to work on after debate over the infrastructure bill wraps up. The focus of that bill will be on parts of Biden’s plans for the economy and families that did not fit into the infrastructure bill.
Democrats can pass that legislation with a bare majority in the Senate, rather than the standard 60-vote supermajority, using a process called “reconciliation” that is unlocked by instructions in a budget resolution. Many Democrats, particularly in the House, have said they will only vote for the infrastructure package if the reconciliation bill passes the Senate, too.
U.S. Sen. Bernie Sanders of Vermont is leading negotiations over the reconciliation bill. Sanders initially balked at including a repeal of the SALT deduction cap in reconciliation, but his stance seems to have softened.
He included $120 billion for SALT-related changes in an earlier draft of the reconciliation bill that came with a $6 trillion overall price tag.
That $120 billion is not enough to cover a complete repeal of the SALT cap, but it could be enough to raise the cap or to target it to certain income brackets.
It’s unclear whether that $120 billion is still in the reconciliation package that senators are negotiating behind closed doors. Sanders has since agreed to a $3.5 trillion plan, but the details of the scaled back agreement are not yet public.
Cost of repeal
The gigantic costs of repealing the SALT cap make it a tough sell.
The Tax Foundation, a Washington think tank, estimates that repealing the SALT tax deduction would cost the federal government $380 billion.
“Most of the benefit at the federal level would flow to higher earners,” says Tax Foundation economist Erica York. The top 1 percent of taxpayers would see their take-home pay increase by about 2.8 percent, while the benefit to the bottom 80 percent of taxpayers would be negligible, the foundation estimates.
That’s hard to square with the purpose of the reconciliation bill, which is focused on easing burdens on lower-income and middle-class Americans, she argues.
“When we’re thinking about the best way to use $380 billion, and we want to do something that helps low-income households, giving a tax cut to the top 1 percent doesn’t seem to fit the bill,” York says.
Aside from the policy arguments, the SALT deduction is a more salient political issue in some states than others.
When Republicans capped the SALT deduction in 2017, they also made changes that make it easier for people to file their taxes without ever worrying about how much they paid in state and local taxes. They did that by nearly doubling the standard deduction, from $6,500 to $12,000 for individual filers. (The numbers are adjusted every year to account for inflation.)
As a result, the percentage of taxpayers nationally who took advantage of the SALT deduction plummeted from 25 percent in 2017 to 10 percent the next year, according to the Tax Policy Center.
The effect varied greatly by state. In Maryland, the SALT deductions amounted to 2.5 percent of the adjusted gross income of its taxpayers, the highest in the country. Wyoming had the lowest, with less than 0.5 percent.
But along with Maryland, the jurisdictions where residents benefited the most from the SALT deduction were (in order) the District of Columbia, Virginia, California, New Jersey, Oregon, Hawaii, Utah, Georgia and New York, according to the Tax Foundation.
In Congress, that means that the lawmakers pushing for a repeal of the SALT cap are predominantly from New Jersey, New York and California. A few legislators from Maryland, Illinois and Washington, D.C., are involved as well.
Local schools, services
But the debate over the SALT deductions is not just about the benefits to individual taxpayers; it’s also about how best to provide services from state and local governments.
That’s why local government leaders, as well as labor unions of public employees like teachers and firefighters, are fighting to repeal the cap.
They worry that the 2017 tax changes will ultimately lead to less taxpayer money to provide local services.
If families are spending more money on federal taxes, the thinking goes, they will be less supportive of local taxes that support services that local governments provide.
“Ultimately, eliminating the $10,000 cap on SALT deductions would improve counties’ ability to deliver essential public services such as emergency response services, public health services, and infrastructure development,” says Eryn Hurley, the associate legislative director for the National Association of Counties.
“Local authority over our own taxing systems is really vital for counties, given the wide variety of services we provide for our constituents,” she says.
Gottheimer, the co-chair of the SALT Caucus, said he tells his fellow Democrats in Congress that keeping the cap in place could also encourage tax-adverse residents and businesses to move from areas that provide robust government services to places with fewer benefits.
“There’s a direct impact on the tax base,” Gottheimer says. “A lot of the things we’re proud of in New Jersey—the good schools, the programs for hard-pressed families—they go with them, because tax dollars leave. That’s a huge problem from a progressive perspective. It puts [those programs] in jeopardy.”
Gottheimer and other opponents of the cap also dispute the characterization that the SALT deduction primarily helps wealthy taxpayers. In New Jersey, he says, a police officer who is married to a teacher could benefit from the tax break.
“In New Jersey,” he says, “this is a middle-class issue.”
He said 30 percent of all New Jersey residents would benefit if the cap were repealed, citing data from the Institute on Taxation and Economic Policy. New Jersey’s share of people benefiting from the change is the highest of any state.
Hurley, from the counties’ association, says middle class families all over the country benefited from the deduction before it was capped.
In Franklin County, Ohio, where Columbus is located, for example, 88 percent of people who claimed SALT deductions in 2016 made less than $200,000 a year.
But Brandon McKoy, the president of New Jersey Policy Perspective, a Trenton-based think tank, said that lawmakers should focus on alternatives that won’t cost as much as a simple repeal.
“This continues to be an unnecessarily either/or conversation: repeal or don’t repeal,” he said in a statement. But tax experts have suggested other options such as raising—but not eliminating—the cap or limiting how much high-earners could deduct.
He warned, though, that the alternatives should address the lopsided benefits of repealing the SALT cap for wealthy taxpayers.
“When it comes to the topic of SALT,” McKoy wrote, “the facts are really straightforward. Lawmakers can pursue repeal, just don’t say it’s progressive policy or advancing equity.”
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