Republicans Return to the SALT Mines

The House GOP’s slim majority guarantees frequent drama, and the latest episode has some Members endorsing Democratic tax policy. A group from high-tax states want to boost the deduction for state and local taxes, and they’re holding up a GOP tax bill to do it.

At least eight Members are maneuvering to increase the amount of state and local tax that can be deducted from federal tax bills. If they succeed, they’ll undo a hard-won GOP policy. Republicans capped that write-off, known as SALT, at $10,000 in their 2017 tax reform. The Joint Committee on Taxation estimates that the cap raises federal revenue by about $80 billion a year, which helped offset lower tax rates on businesses and individuals.

Legislators from high-tax states say the cap is a rotten deal for their constituents. “Congress screwed New Yorkers on SALT,” said Rep. Nick LaLota, one of the group’s leaders, in July. “I will not be part of another Congressional attempt to screw NY.”

He’s joined by fellow New York Reps. Anthony D’Esposito, Marc Molinaro, Mike Lawler and Andrew Garbarino, along with New Jersey’s Tom Kean and Chris Smith, and California’s Mike Garcia. All say they’ll vote against a pending tax-cut package that has passed the Ways and Means Committee unless it’s amended to increase or eliminate the cap on SALT, according to a Capitol Hill source. That’s more than the five votes Republicans can afford to lose in an expected party-line floor vote.

But how does the lack of a special favor “screw” New York? State tax rates are set in state capitals like Albany, and state politicians are free to cut those rates. The SALT deduction makes it easier to keep taxes high because the write-off shields residents from the pain of those punitive rates.

And since blue-state taxes are stacked on high earners, the deduction’s benefits flow in substantial part to the wealthiest taxpayers. A 2020 analysis by the Brookings Institution found that the top 1% of earners would claim 57% of the benefit from eliminating the SALT cap.

Ways and Means Chairman Jason Smith hasn’t budged on SALT and says he doesn’t want his Missouri constituents subsidizing the tax preferences of the progressive coasts. He’s right politically and on the tax-policy merits. Lifting SALT would increase political pressure to raise federal tax rates to make up for lost revenue.

The Ways and Means plan is mediocre even without the SALT baggage. It does the good deed of extending expiring provisions of the 2017 tax bill, but it includes a misguided boost to the standard deduction. For only two years, it would add $4,000 to the general write-off available to filers who don’t itemize, bringing the sum to about $32,000 for joint filers.

The bonus would be smaller for taxpayers earning more than $400,000, tapering off completely around $480,000. Unlike cutting income-tax rates, this brief and limited rebate would offer little incentive for taxpayers to work or invest more. Limiting the standard deduction by income is also a bad tax precedent that Democrats will expand on.

House GOP leaders announced their tax plan shortly after the June debt-ceiling deal with President Biden, hoping it would show voters more of their fiscal priorities. Speaker Kevin McCarthy originally sought a vote on the package before Congress’s August recess, but the SALT standoff has delayed it until September at the earliest.

The fight shows the disunity within the House majority over tax issues that used to be a GOP strength. The division over special tax carve-outs plays into Democratic hands.