Personal Finance

House Democrats promise ‘meaningful’ relief for state and local tax deduction cap

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Key Points
  • House Democrats confirm they will pursue “meaningful” change to the $10,000 limit on the federal deduction for state and local taxes.
  • The measure has been a sticking point in negotiations among lawmakers in high tax states. 
  • However, repealing the cap on the write-off may primarily benefit wealthy households, opponents say.
Rep. Tom Suozzi, D-N.Y., speaks during a news conference announcing the State and Local Taxes (SALT) Caucus outside the U.S. Capitol on April 15, 2021.
Sarah Silbiger | Bloomberg | Getty Images

House Democrats have said they will pursue "meaningful" change to the $10,000 cap on the federal deduction for state and local taxes, known as SALT.

The controversial measure is part of former President Donald Trump's signature 2017 tax overhaul and has been a pain point for Americans in high tax states. 

Since the Tax Cut and Jobs Act, those who itemize deductions can no longer write off more than $10,000 for property and state income taxes on their federal return.

While the Ways and Means Committee didn't address SALT in its package of tax proposals, Chairman Richard Neal, D-MA, along with Reps. Bill Pascrell, Jr., D-NJ, and Tom Suozzi, D-NY, released a joint statement saying they are "working daily" on the reform.

 "We are committed to enacting a law that will include meaningful SALT relief that is so essential to our middle-class communities and we are working daily toward that goal," they said.

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As lawmakers debate President Joe Biden's agenda, repealing the SALT deduction cap has been a sticking point among lawmakers in high tax states.

A group of moderate Democrats, mostly from New Jersey and New York, has said they won't support a bill unless it restores the tax break.

"I have been consistent for six months: 'No SALT, no deal'," Suozzi said in a separate statement.

While Democrats don't need Republican support to pass their $3.5 trillion spending bill, they have to get votes from every Democratic senator and nearly every House member.

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Blocker: SALT relief could be a sweetener to help get the budget bill past the finish line

However, the proposed repeal has received pushback from lawmakers who argue the tax cut may primarily benefit the wealthy. 

The top 20% of taxpayers may receive more than 96% of the benefit of a SALT cap repeal, according to a Tax Policy Center report, and only 9% of American households may be affected.

Moreover, the top 1% of households may receive 54% of the benefit, with an average tax break of $34,000.

The cap on the SALT deduction brought in $77.4 billion the first year it was instated, according to the Joint Committee on Taxation. Removing the limit for 2021 may cost $88.7 billion, and more in future years.

In the meantime, a growing number of states now offer workarounds for the SALT cap for pass-through business owners. These strategies may allow some businesses to bypass the deduction limit by using a state levy to pay for some of the owner's state income taxes.