The latest effort to combat the limit President Donald Trump put on the federal write-off for state and local taxes would provide immediate relief for married couples in states like New Jersey who have been hardest hit by the cap.
Legislation that was approved yesterday by the U.S. House Ways and Means Committee would double the $10,000 cap on what’s known as the SALT deduction that was established for all taxpayers by Trump in 2017.
The bill, which is sponsored by U.S. Rep. Bill Pascrell (D-9), creates a $20,000 SALT deduction for married couples who file jointly. It would go into effect immediately for tax year 2019.
Cutting out the SALT cap
The same measure also calls for the SALT cap to be repealed for tax years 2020 and 2021. The top-end federal income-tax rate of 39.6% would be restored, starting in 2020, to offset revenue that wouldn’t be collected by the federal government once the $10,000 cap is eliminated. (The top-end income-tax rate was lowered to 37% in the same 2017 tax legislation that established the $10,000 cap on the SALT deduction.)
“By reversing the destructive SALT cap, we can return some of that money to where it belongs, with middle-class taxpayers,” Pascrell said when the bill was introduced earlier this week.
Despite yesterday’s progress in the House, which is controlled by Democrats, it’s unclear whether the latest SALT legislation can make it out of the Republican Senate, where members will likely be leery of restoring the higher income-tax rate.
But Pascrell’s bill and others like it have brought new attention to the fact that the current SALT cap delivers what many view as a penalty for married couples by offering the same deduction limit to both single filers and married couples. That could help shape future reform efforts and address concerns being raised by liberal groups that an outright repeal would largely benefit the wealthy.
Dubbed the Tax Cuts and Jobs Act, the 2017 overhaul of the federal tax code was meant to stimulate the economy by reducing individual income-tax rates and slashing the burden on corporations and those leaving behind large estates. Changes were also made to several exemptions and deductions, including the standard deduction, which was increased to $12,000 for single filers, and $24,000 for married couples filing jointly. (The standard deductions will be higher for tax year 2019, at $12,200 for individuals and $24,400 for married couples.)
To help pay for the tax changes, the limit on the SALT write-off was put in place by Trump and the then-Republican Congress.
Double whammy for NJ taxpayers
The new tax policies took effect in tax year 2018, and the impacts varied widely among tax filers in New Jersey. But many were hit hard since the combination of local property-tax bills, which average nearly $9,000, and high state income taxes could no longer be fully deducted from their federal taxes — increasing the amount of income subject to the new federal tax rates.
In touting his new legislation on Wednesday, Pascrell noted the average value of the SALT deduction claimed by New Jersey families in 2017 was nearly double the $10,000 limit.
“The tax-scam law of 2017 remains one of the most destructive bills we’ve ever seen because it specifically went after the middle class,” Pascrell said.
The capping of the previously unlimited SALT deduction at $10,000 was widely viewed as one of the factors that contributed to a blue wave occurring in 2018 that resulted in the flipping of several of New Jersey’s House seats from Republican to Democrat. Five other New Jersey lawmakers, all Democrats, have signed on as co-sponsors of the new SALT legislation alongside Pascrell. They are U.S. Reps. Andy Kim (D-3), Tom Malinowski (D-7), Albio Sires (D-8), Mikie Sherrill (D-11), and Bonnie Watson Coleman (D-12).
“I’m standing up with my colleagues from New Jersey and across the country to support this bill to undo the damage and help middle-class families that often had to pay thousands more in taxes,” Kim said on Wednesday.
Another take on dumping SALT cap
Sherrill, meanwhile, has previously introduced a bill that would also relieve married couples by replacing the SALT cap with the same deduction that’s allowed under the standard deduction for both single filers and married couples.
Speaking on the House floor earlier this week, Sherrill suggested limiting SALT write-offs results in “double taxing” and she also called on her colleagues to enact reforms before the end of the year.
“Capping SALT deductions is an attack on New Jersey residents, businesses and homeowners — and unfairly imposes a marriage penalty on couples filing jointly,” Sherrill said. “It is an attack on states that invest in their communities — investments in roads, libraries, schools, first responders and teachers.”
But in the wake of the legislative efforts being mounted by these Democrats and others, including U.S. Rep. Josh Gottheimer (D-5), several left-leaning, Washington, D.C., think tanks have been raising concerns that lifting the SALT cap could ultimately end up delivering a big tax cut to the nation’s wealthiest residents — a group that is already seen as the biggest beneficiary of the 2017 tax changes.
For example, a new report from the Center on Budget and Policy Priorities estimated that 80% of the benefit of a SALT-cap repeal would go to just the top 5% of tax filers. That followed up on a report released last year by the Institute on Taxation and Economic Policy that estimated 60% of the benefits would go to just the top 1% of filers.
Also weighing in this week on the proposed SALT changes was the Center for American Progress.
“There are some middle-class taxpayers who would see some benefit from the repeal, but the tax cut they receive would pale in comparison to that received by the super wealthy, who in some cases would be able to deduct millions in state and local tax payments,” the group said.