Republicans are set to increase the $10,000 cap on state and local tax deductions as part of their major tax overhaul, but the size of the increase is a subject of negotiation between leadership and blue-state members who could tank the whole bill.
In lifting the cap, Republicans would be undoing a reform they won in 2017. But, to secure the votes of members of the party from high-tax states, Republican leaders have vowed to raise the cap as part of this year’s reconciliation, a legislative process that allows bills to bypass the filibuster and pass with only a simple majority in the Senate. They want to extend the 2017 Tax Cuts and Jobs Act and add new tax cuts proposed by President Donald Trump to the mix.
The 2017 Republican tax overhaul imposed a $10,000 cap on federal deductions for state and local taxes. By limiting those deductions, Republicans raised massive revenues to help offset those lost from other provisions of the bill, such as the lower tax rates, the doubled standard deduction, and the boosted child tax credit. Fiscal conservatives had long sought to curtail deductions for state and local taxes, or SALT, on the grounds that they subsidize excessive spending by lower-level governments, especially those in California, New York, and other liberal areas.
In 2017, then-House Speaker Paul Ryan lost the votes of a dozen members, mostly from California, New York, and New Jersey. But Ryan had a sufficiently large majority that he didn’t need their votes.
This time around, Speaker Mike Johnson can only lose one or two votes. So the centrist Republicans in high-tax states have leverage when they demand that the $10,000 cap be raised.
Raising the cap is a key priority for lawmakers such as Reps. Mike Lawler (R-NY), Nick LaLota (R-NY), and Nicole Malliotakis (R-NY).
“The first thing to know is it’s about vote-counting in the House of Representatives,” Kyle Pomerleau, a senior fellow at the American Enterprise Institute, told the Washington Examiner. “They have put a lot of pressure on leadership to raise the cap, otherwise they’re not going to vote for the bill.”
Many rank-and-file Republicans are opposed to SALT deductions, but will likely vote to raise the cap if Trump and Republicans are able to come to an agreement to pass other key tax cut provisions and extensions.
The two main questions when it comes to the SALT cap increase are how big of an increase it will be and how much it will cost in the context of the overall reconciliation legislation. The numbers are important because Republicans have promised to extend trillions of dollars’ worth of tax cuts, plus implement several new tax agenda items promised by Trump, such as eliminating taxes on tips, which could further lower revenues by hundreds of billions of dollars. Yet fiscal conservatives will rebel if the bill adds too much to deficits.
Lawler opened negotiations with a big ask.
In January, Lawler reintroduced the SALT Fairness and Marriage Penalty Elimination Act, which would dramatically hike the SALT deduction cap from $10,000 to $100,000 for single filers and would allow married couples to deduct jointly up to $200,000. Today’s version of the SALT cap is not larger for couples, effectively imposing what analysts call a marriage penalty.
Additionally, Rep. Andrew Garbarino (R-NY) introduced his SALT Deductibility Act this year, which would completely eliminate the SALT cap.
“Since the SALT deduction cap was implemented, hardworking Americans from states like New York have been suffering from unfair double taxation — all while receiving a fraction of what they contribute in federal funds,” Garbarino said at the time. “Enough is enough. We are calling for a full repeal of the cap that disproportionately impacts middle-class families in our districts.”
Raising the cap to $100,000 or eliminating it is unlikely, given the opposition from deficit hawks. Many also opposed raising the cap because it would primarily benefit high-income earners. The Tax Policy Center found that the highest-income 20% of households would receive more than 96% of the tax cut if the cap were fully repealed.
“People are going to start walking away if it gets too high,” Tim Doescher, executive director at the Committee to Unleash Prosperity, told the Washington Examiner.
The fiscal costs of expansions of the sizes proposed by Lawler and Garbarino would be huge, and presumably would cause other tax priorities to be downsized or cast to the wayside.
The Committee for a Responsible Federal Budget found that increasing the cap to $100,000 for individual filers and $200,000 for joint filers would reduce tax revenue by just over $1 trillion over the next decade — an enormous amount, in the context of the overall tax cuts bill. For comparison, a straightforward extension of all the Trump tax cuts plus the new tax breaks promised by Trump would add about $6 trillion to the debt over a decade.
“That would be getting rid of a lot of the revenue that it would need. It makes it even more expensive on top of what was already an expensive package,” Garrett Watson, a senior policy analyst at the Tax Foundation, told the Washington Examiner.
Watson wondered if Lawler’s push for a $100,000 cap is more of a negotiating strategy, and that the goal is to push for a higher cap that would fall between the current $10,000 level and that.
“Maybe that’s the reach ask, and they know it’s gonna come down from there, so they know they might land up at [$50,000], they’re fine with that, they’re just asking for [$100,000] to start the bid,” he said.
But even a $40,000 cap would be exceedingly expensive — somewhere in the ballpark of $910 billion over a decade, according to the CRFB.
There are varying views among the SALT lawmakers on exactly what would satisfy their push to raise the cap. Malliotakis, for instance, said earlier this year that any increase is a win, according to Roll Call.
“Any increase, whether it’s going to be doubling it, or tripling it, or quadrupling it, is a win. But, you know, we’d like to see it a little more than doubled,” she said.
Earlier this month, Bloomberg reported that Republicans were eying lifting the SALT cap for individuals to $25,000, although a number of House Republicans — enough to tank the tax bill — have said that $25,000 is too low.
Another idea that has been tossed around is eliminating the marriage penalty. But increasing the SALT cap to $20,000 for couples would still be costly. The Tax Policy Center found that doing so would add $225 billion to the federal debt over a 10-year period. Doing so would also disproportionately benefit higher earners. The CRFB found that cutting the marriage penalty would give 94% of the benefit to households earning over $200,000 per year.
But again, merely eliminating the marriage penalty isn’t likely to be enough to satisfy the demands from SALT lawmakers.
Pomerleau, from AEI, said this week he would be surprised if the cap is raised much higher than $20,000 for individuals and $40,000 for joint filers.
“The reason is that they just don’t have the budget space to do the big increases that some of these people were asking for,” he said.
HERE ARE THE MAJOR DILEMMAS FACING THE GOP AS IT WRITES TAX OVERHAUL
While Republicans are aiming to make the 2017 tax cuts permanent, there is always the possibility that the SALT cap could be temporarily extended, something that could make the budget math appear better.
“Maybe there’s folks who want to see this debate happen again in the future, and that would suggest a temporary extension of some sort of the cap with an expiration later on,” Watson said.
