The movement to roll back limits on how much state and local taxes Americans can deduct on their federal returns took a hit Wednesday when a vote to advance a SALT relief bill failed in the House of Representatives, but taxpayers have reason to hope that relief is on the way.
That’s because the cap on state- and local-tax deductions — passed as part of the 2017 tax-reform package — is set to expire after next year. Proponents of the cap will have a difficult time cobbling together the votes to extend it in its current form, no matter which party controls the White House and Congress next year.
“There are high-tax, high SALT deduction areas of every state in the country,” Henrietta Treyz, economic policy analyst at Veda Partners and former Senate Budget Committee staffer, told MarketWatch. “It’s disproportionately the blue states, but there are many people in red states that got seriously hurt by this.”
Congressional Republicans instituted a $10,000 cap on the amount of state and local taxes can be deducted from taxpayers income for the purposes of calculating federal tax liabilities as part of the 2017 tax reform package that was the policy centerpiece of former President Donald Trump’s administration.
The measure was a critical piece of the tax deal that raised hundreds of billions of dollars in taxes, enabling Republicans to lower the corporate tax rate from 35% to 21%.
Treyz noted that then-Senate Majority Leader Mitch McConnell, a Republican from Kentucky, was a key figure in pushing through a cap on SALT deductions.
”I can’t stress enough how important Mitch McConnell was to this entire process,” she said. “He’s the one who marched this offset down the playing field for Republicans.”
McConnell’s influence in the GOP, however, has ebbed from its heights seven years ago, while Congressional Republicans have struggled to stay united on tough votes, and extending the SALT cap would be one such difficult vote that harms many constituents even in lower-tax red states.
The dozens of representatives of both parties who support repealing or raising the cap on SALT deductions have a lot of leverage next year when most of the provisions in the 2017 bill are set to expire. Congress will have to come to a deal to extend some of these provisions or deal with the political consequences of tax increases on a wide swath of households and businesses.
How much leverage likely depends on the outcome of the 2024 elections. If Republicans repeat their 2016 performance and take the House, Senate and White House, Treyz believes GOP leadership will have to make concessions to SALT cap opponents in their own caucus, like taking up the recently defeated bill that raised to $20,000 for taxpayers making less than $500,000.
If Democrats gain a trifecta — a tall order given the difficult Senate map this year — the cap could lifted to as high as $50,000 for those earning less than $500,000, as Democrats have more options for raising revenue, like hiking the corporate rate, Treyz noted.
Key in this analysis is the fact that current West Virginia Sen. Joe Manchin, who fought against any increase in the SALT cap in recent Democratic-led legislation, is not running for re-election.
One election scenario that could lead to a delay in any relief for taxpayers who have been affected by the SALT cap is one that delivers divided government. In this scenario, Treyz argues, it’s possible that Congress punts on the issue by simply extending the current tax framework for two years, as they did in 2010 during negotiations over whether to extend the George W. Bush tax cuts enacted a decade earlier.
That said, in what will likely be a close to evenly divided Congress, the bipartisan SALT caucus could have enough sway to include a SALT cap hike in any tax legislation, even one that otherwise extends the status quo.
“If the SALT caucus were to stick together and the Republicans in the House that support SALT relief stick with Democrats, you could easily see a bipartisan provision that raises the cap,” Treyz said. ”There are not going to be too many giveaways in a bipartisan punt on taxes, but SALT relief could be one.”
