SALT Deduction Cap Vexes GOP After Vexing Democrats After Vexing GOP

WASHINGTON—The $10,000 cap on the state and local tax deduction is bedeviling Congress. Again. 

Taxpayers who itemize deductions can get a federal break for state and local income- and property-tax payments. Republicans in 2017 limited that deduction to help pay for tax cuts, and the new restrictions largely pinched high-income people in high-tax states. 

That decision split the GOP, divided Democrats who tried to repeal it, and just sparked yet another intraparty fight.

The latest dispute over what is colloquially known as the SALT cap pits a group of suburban Republicans against the rest of their party. The lawmakers, who largely hail from competitive districts in high-tax states, say they will block a GOP tax bill unless the top tax writer, Rep. Jason Smith (R., Mo.), agrees to raise or scrap the $10,000 limit.

“In my district, if you own a home and you have a job, you hit the $10,000 cap,” said Rep. Mike Garcia, a Republican who represents a Los Angeles-area district. “This issue and our ability to navigate the SALT is going to be what allows us to keep the majority.”

In Congress, geography sometimes trumps ideology, and the SALT cap scrambles the usual partisan discourse regarding taxes. Republicans oppose raising taxes on top earners, but most support the cap because it reduces what they see as a federal subsidy for residents of high-tax states. Democrats who oppose the cap run into objections in their own party because the break mainly benefits high-income people.

The SALT cap, meanwhile, is most hated in suburban districts in high-tax states that have been among the hardest-fought races in recent elections. Those areas gave Democrats control of the House during the Trump administration and were pivotal in the shift to a narrow GOP majority last year. 

Now the issue is complicating legislation that Smith and House GOP leaders want to pass that would reverse business-tax increases that Republicans baked into the 2017 law and that took effect in recent years. Without quick action by Congress, many small research-intensive companies face enormous tax bills because of a provision that changed how they deduct research costs.

While Smith’s bill doesn’t address the SALT cap, it would temporarily expand the standard deduction for individuals. That would make the $10,000 limit less important for some households.

Smith, who leads the House Ways and Means Committee, said he has been meeting with Republicans from high-tax states and is confident he has enough votes to get his bill through the House after Congress’s summer break. It appears unlikely to become law as written. Democrats are open to business-tax changes but also want to expand the child tax credit in ways that Republicans oppose. 

Smith suggested that SALT cap changes could be possible in an end-of-year bipartisan bill—but not now. 

“You don’t vote against a bill because of what’s not in it,” Smith said.

The SALT fight has dogged lawmakers for years. In 2017, House Republicans considered eliminating the deduction before settling on the $10,000 cap. The House passed that bill with 12 Republicans opposed, but Smith and House Speaker Kevin McCarthy (R., Calif.) don’t have that cushion now with their 222-212 majority.

“I’m going to continue to stand firm,” said Rep. Nick LaLota (R., N.Y.), who represents eastern Long Island and is seeking a much higher cap, at least. “This is oxygen to many of my constituents. This is the one thing that cuts through all the partisan BS.”

Garcia, the Los Angeles-area lawmaker, would prefer no cap but said he would settle for doubling it. Leaving it at $10,000, he said, would be “a continuation of this middle-finger mentality” toward his constituents.

“I’ve been very blunt with Jason Smith,” Garcia said. “We can have these conversations now when you’re the chairman, or we can have these conversations in two years when you’re the ranking member.”

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The 2017 law reduced taxes for most people, even in high-income, high-tax states. But the measure’s changes to rates, brackets and deductions were less visible than the quick comparison of a property-tax bill with the $10,000 threshold. 

Suburban districts helped give Democrats the House majority in the 2018 election—and prompted a new SALT battle. Lawmakers from California, New Jersey and New York insisted on raising or repealing the cap in any tax legislation, using a “No SALT, No Deal” rallying cry. The House eventually passed a bill with an $80,000 cap, but it flopped in the Senate and never became law. 

Rep. Richard Neal (D., Mass.) was Ways and Means chairman then. He watches Republicans struggle now and describes himself as overjoyed. 

“In the minority, they made it sound simple,” he said. “They’ve now discovered that their majority hinges upon six people who really need some SALT relief.”

The cap became more onerous over time because it doesn’t increase with inflation. But states have created workarounds for business owners, so the burden now largely falls on wage earners and property owners.

Neal wants the chairmanship back in 2025, which could shift the problem back onto his shoulders. If Congress does nothing, the cap disappears after that year. State and local taxes would be fully deductible, although expiring changes to the alternative minimum tax would limit the break for many. 

But all of the 2017 tax cuts for individuals also expire after 2025. If lawmakers want to extend them without making deficits even larger than projected, the SALT cap is an obvious tool. The provision raises a lot of money, and it does so from people with very high incomes.

“What I would hope is that policy makers grapple with trade-offs,” said David Kamin, a former senior aide to President Biden. “If you’re not going to do the SALT limitation, then there should be reduced tax cuts.”

Write to Richard Rubin at [email protected]