Personal Finance

House passes bill to lift $10,000 cap on state and local tax deductions

Key Points
  • The “Restoring Tax Fairness for States and Localities Act” would eliminate the $10,000 limit on state and local tax deductions for 2020 and 2021.
  • On Thursday, the House narrowly voted to pass the bill, 218-206, largely along party lines. The measure is unlikely to make it through the Senate.
  • This bill calls for increasing the SALT-cap to $20,000 for married couples filing jointly in 2019, as well as raising the highest marginal tax income tax rate to 39.6%.
Busakorn Pongparnit | Moment | Getty Images

The Democratic-controlled House passed a bill on Thursday that would do away with the $10,000 limit on the itemized deduction for state and local taxes for two years.

Legislators narrowly voted in favor and did so largely along party lines: 218 to 206.

The measure, dubbed the "Restoring Tax Fairness for States and Localities Act" or HR 5377, proposes increasing the so-called SALT cap to $20,000 for married taxpayers who are filing jointly in 2019.

It also calls for the elimination of the SALT cap in 2020 and 2021.

The bill, sponsored by Rep. Thomas Suozzi, D-N.Y, along with Reps. Bill Pascrell, D-N.J., and Mike Thompson, D-Calif., marked the latest effort by blue states to fight back against certain provisions in the Tax Cuts and Jobs Act.

The 2018 overhaul of the tax code placed the $10,000 cap on SALT deductions.

Congressmen Gottheimer and Reed on the bipartisan push to appeal SALT deducation cap
Reps. Gottheimer and Reed on the bipartisan push to appeal SALT deducation cap

"This has been a high priority for Democrats in the House since the Tax Cuts and Jobs Act was passed," said Nicole Kaeding, vice president of policy promotion at the National Taxpayers Union Foundation.

"The concern has been over the impact of the limit on individuals in high-tax states such as New York, New Jersey and California," she said.

Though the bill is unlikely to get much further in the remaining weeks of the year, there's always the possibility it may return in 2020.

"There is no chance that this bill is getting through the Senate, but I think Democrats will continue to talk about the impact of the SALT deduction," Kaeding said.

Legislators in support of the bill plan to continue pushing.

"This is going to continue to be an issue that comes up every year until we pass and sign it into law," said Rep. Josh Gottheimer, D-N.J. "It's a hit to so many parts of the country, a tax hike for my district and for a lot of us in the Northeast and on the coasts."

"I'm not willing to give up on this version [of the bill] until we actually do everything we possibly can to convince the Senate to include it," he said.

Costly on the coasts

San Francisco
Compassandcamera | Getty Images

New York, New Jersey and California are among the states where taxpayers are feeling the brunt from the $10,000 SALT cap.

Among New Yorkers who itemized in 2017, the average SALT deduction claimed was $23,804, according to the Tax Policy Center.

New Jersey itemizers wrote-off an average of $19,162 on state and local taxes that year, while Californians claimed $20,451, the Center found.

These states are also home to some of the highest income taxes in the nation.

Meanwhile, New Jersey residents are paying some of the highest property taxes.

Controversy over the SALT cap also has spurred litigation by the affected states.

New York, Connecticut, Maryland and New Jersey have filed suit against the Treasury Department and the IRS, asserting that the SALT deduction limit was unconstitutional.

Separately, New York, New Jersey and Connecticut are also fighting the Treasury Department and the IRS in court over the agencies' move to block workarounds established by the three states.

Rising tax rates

Suozzi's bill also calls for raising the highest marginal individual income tax rate.

The Tax Cuts and Jobs Act slashed individual income tax rates across the board, lowering the top rate for the highest earners to 37% from 39.6%.

The proposed legislation would raise the rates back up to 39.6% for the highest earners and reduce the income threshold at which the top rate would apply.

"It's hard to see it happening as a standalone bill, even with the rate increase," said Jared Walczak, director of state tax policy at the Tax Foundation.

"It's hard to see it happening unless it's part of a much larger tax bill," he said.

More from Personal Finance:
Three states with the highest income taxes
How much you can save toward retirement in 2020
This is what it takes to get into a top college