SALT: Here's how lawmakers could alter key contentious tax rule

Democrats and Republicans have dug in when it comes to the state and local tax (SALT) deduction and the upcoming budget reconciliation package.

On one side, you have lawmakers like Rep. Tom Suozzi (D., N.Y.) who has made “No SALT, No Deal” a mantra. In a recent statement, Suozzi (from the very highly-taxed North Shore of Long Island as well as some neighborhoods in Queens) said, “I will not support any changes to the tax code unless there is a restoration of the SALT deduction.”

On board with him are lawmakers from other parts of the country with high local taxes and high property values. They've banded together into a SALT caucus that boasts 32 members.

Then there are large swathes of the country that would see minimal benefits from a SALT restoration and lawmakers – both Democrats and Republicans – representing these areas are agnostic or hostile to bringing back the full deduction.

The SALT deduction let individual taxpayers who itemize their personal deductions to deduct their aggregated state and local taxes on their annual tax return. In 2017, the Republicans pushed through the Tax Cuts and Job Act, which capped that deduction at $10,000. It was seen by Democrats as a punitive move to hurt blue states, many of which have the highest local tax rates in the U.S.

There is also study after study after study finding the benefits of a SALT restoration almost exclusively go to the rich. According to the Tax Policy Center, a full repeal of the SALT cap would lead to almost 70% of the benefits going to people with annual incomes above $500,000.

“It is just mind-blowing they're even talking about this kind of tax policy,” Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, told Yahoo Finance (video above). It's “not tax reform, it's tax deform," he added.

But the laws of politics suggest that negotiators will try to find something in the middle. A recent statement from leading House Democrats on the issue – including Suozzi – said they were “committed to enacting a law that will include meaningful SALT relief” in the bill, notably not calling for a full restoration of the cap.

Rejiggering SALT, rather than simply going back to how it was before – allowing for an unlimited tax deduction – is more complicated than it might seem.

Here are some of the options for what a compromise or “SALT relief” might look like.

‘There are ways to restructure SALT’

The state and local tax deduction gives taxpayers relief on their federal tax bill if they're dealing with a hefty local tax burden. Wealthier coastal states – like New York, New Jersey, Massachusetts, and California – have the highest tax burdens and more wealthy Americans who have historically benefited from the deduction.

Rep. Alexandria Ocasio-Cortez (D., N.Y.), a rare New York lawmaker who isn’t necessarily on board with restoring SALT, has noted “[t]here are ways to restructure SALT deductions to provide relief to middle-class families”.

That may be possible, Goldwein says, but it’s tricky. “You could do something totally different, like get rid of the SALT deduction and replace it with SALT credits,” he says, but the bottom line is “within the constraints of the current SALT deduction...there's no structure that would benefit the middle class.”

Analysis by Goldwein’s group has found that a full SALT cap repeal would deliver an average benefit of only around $15 for a household in the middle of the income spectrum.

Goldwein outlined other possible ways to restructure the program, from moving the SALT deduction out of itemized deductions to be more of an above-the-line deduction instead, or replacing the SALT cap with another kind of tax cap.

In any case, a restructuring may address questions about the regressive nature of the tax, but it could then cause a political problem. “I don't think it would solve the problem that people from New Jersey are really worried about,” Goldwein says.

Leaders in Congress pushing the repeal are also more likely to argue that the deduction’s structure should stay the same, saying it makes it easier for governments at the local level to tax the rich and deliver government services with the money.

Henry Connelly, a spokesperson for Speaker Nancy Pelosi, said in a recent statement that the 2017 SALT deduction cap was a “Republican scheme to double-tax blue communities and not red ones in order to choke off the revenue that high-cost progressive states and cities need to sustain services and meet the needs of their residents.”

Suozzi and his fellow SALT advocates have also organized press conferences with groups like teachers unions and mayors to claim that lost local revenue is hurting them.

Plans to increase the SALT cap

There are other ideas that would provide a version of the SALT tax somewhere in between how it operated prior to 2018 and today.

One option reportedly under consideration by lawmakers would eliminate the cap on the deduction but only for those making $400,000 or less a year. A second option would be to increase the cap – currently set at $10,000 a year – to a higher level, but not remove it entirely.

Either approach is likely to run into opposition, with analysis showing they would still be highly regressive.

And on top of that, there's the difficult math of how any version of a SALT restoration would fit into the larger multitrillion-dollar package of programs.

A full repeal of the SALT cap is projected to cost about $85 billion per year, or about $350 billion in total before the cap is set to expire anyway in 2026. Democrats do not have a SALT restoration measure in the still-forming reconciliation package but leaders have promised to add it.

That added cost will likely run headlong into the need to drastically cut the overall $3.5 trillion package to satisfy objections from moderate Democrats like Sens. Joe Manchin of West Virginia and Krysten Sinema of Arizona.

Goldwein says he hopes that SALT reform will go away or be scaled back “as they're sugaring stuff off, trying to get from that $3.5 trillion to $1.5 or $2.5 trillion.”

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.

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