WASHINGTON, DC – The Democratic-controlled House approved legislation Thursday to suspend for two years the $10,000 cap on state and local tax deductions that came with President Donald Trump’s massive 2017 tax law. The deductions are widely popular, especially in high-tax, heavily Democratic states like New York, New Jersey and California.
The legislation to suspend the cap passed the House by 218-206. Five Republicans from high-tax Northeastern states bucked their party to support the Democrats’ bill because it would help many of their constituents.
Prospects for the bill, whisked through the House as part of a year-end legislative rush, are dim in the Senate, where Republicans hold a 53-47 majority. Sen. Chuck Grassley, R-Iowa, chairman of the tax-writing Senate Finance Committee, has expressed opposition to any repeal of the so-called SALT (state and local taxes) cap, as have some Senate Democrats from lower-tax states.
Under the proposal, the lost revenue would be paid for by hiking the top individual income tax rate to nearly 40% for six years from the current 37%. The legislation would cost $42 billion in reduced tax revenue from 2020 to 2024, the Congressional Budget Office has estimated.
The bill also would increase the maximum deduction for some expenses for teachers, and would create a new deduction for certain expenses for first responders.
Thursday’s action on the bill followed House approval Tuesday of a $1.4 trillion government-wide spending package that would forestall a federal shutdown this weekend and give Trump steady funding for his U.S.-Mexico border fence. The package also includes renewal of a raft of expired and expiring tax breaks, including deductions for mortgage insurance premiums, college tuition and large medical bills.
The cap on the SALT deduction limits to $10,000 the total amount of property taxes or state or local taxes that consumers can deduct on their federal returns. Democratic candidates in suburban districts in high-tax states had campaigned last year on eliminating the cap on state and local deductions.
“Housing affordability is a key issue,” said Matthew Chase, CEO of the National Association of Counties. “When you lose that deduction it takes away money from homeowners, who support schools and public services with their local taxes.”
But Republican lawmakers and some liberal Democratic critics maintain that removing the cap would cost hundreds of billions of dollars in revenue while mostly benefiting the affluent, not the middle class.
The SALT cap was imposed in 2017 to help pay for the sweeping package of individual and corporate tax cuts that the Republicans muscled through Congress. The Republican-written tax law gave Trump his signature legislative achievement.
The law that took effect Jan. 1, 2018, was the most extensive rewrite of the U.S. tax code in three decades, adding an estimated $1.5 trillion to the ballooning deficit. It provided steep tax cuts for corporations and the wealthiest Americans, and more modest reductions for middle- and low-income individuals and families. While the law slashed the corporate tax rate permanently from 35% to 21%, its tax cuts for individuals expire in 2026.
Conservatives argue that unlimited state and local deductions amount to a federal subsidy for the wealthy in high-tax states.
“In the end, why should low-tax states be forced through the tax code to subsidize high-tax states? Why should a farmer in Nebraska subsidize a banker in Manhattan?” Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, said in a statement.
However, many middle-class families in those states face disproportionately high housing costs and have depended on deducting their state and local taxes. If states and localities reduce taxes to ease those families’ burden, cuts to social programs and public services could follow.
Despite Republican arguments to the contrary, high-tax states have tended to send more money to Washington than they receive back in federal spending.