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State and Local Tax Deductions to Increase? Debate over Repealing the SALT Deduction Heats Up

December 13, 2019

State and Local Tax Deductions to Increase? Debate over Repealing the SALT Deduction Heats Up

December 13, 2019

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The Democrats’ bill would have an estimated $6.2 billion positive effect on tax revenue collected over the next decade.

As the 2019 legislative calendar approaches its end, House Democrats are pushing for a vote to increase the $10,000 cap on the state and local tax (SALT) deduction.

SALT Cap Bill Could Move to Senate Before Holiday Recess

On December 10, 2019, H.R. 5377, the Restoring Tax Fairness for States and Localities Act, was introduced by Representative Thomas Suozzi of New York, followed promptly by committee markup and a committee vote on December 11. House Ways and Means Committee members hope to hold a floor vote on the bill prior to adjourning for the 2019 holiday recess and send the bill on to the Senate. Representative Mikie Sherrill of New Jersey, a strong proponent of the bill’s passage, has designated Congress’ final days in session this year as the “12 days of SALT.”

The House Democrats’ SALT cap bill starts by immediately eliminating the marriage penalty imposed on joint filers. Presently, joint filers are limited to deducting the same amount of SALT as single filers. In 2019, under the proposed bill, married filing jointly taxpayers would be allowed a maximum SALT deduction of $20,000. This would be followed by a temporary, full repeal of the SALT cap in 2020 and 2021. In 2022, the $10,000 SALT cap would be reinstated.

The increase in the cap for joint filers followed by full repeal for two years would be paid for by restoring the top 39.6 percent tax bracket at a lower income threshold. Under the Tax Cuts and Jobs Act (TCJA), the top tax bracket was reduced to 37 percent and the 39.6 percent bracket was not scheduled to return until 2026. According to a Joint Committee on Taxation report, the Democrats’ bill would have an estimated $6.2 billion positive effect on tax revenue collected over the next decade.

Partisan Issue

The SALT cap bill backed by House Democrats is expected to face stiff resistance from Republicans. A study by the Urban-Brookings Tax Policy Center found the SALT cap has disproportionately affected certain states. The study showed 19 out of the top 20 districts impacted by the cap are controlled by Democrats. House Democrats are on the offensive for a vote prior to year’s end to show constituents they are working toward a solution. 

On the other side of the aisle, Republican Congressman Kevin Brady of Texas argues that if the cap is lifted or eliminated, the rich would benefit most and it would only encourage high-tax states to further increase taxes on middle-income families and workers.   

TAG’s Perspective

In addition to capping the SALT deduction at $10,000, the TCJA raised the income thresholds (exemptions) subjecting taxpayers to alternative minimum tax (AMT). Taxpayers subjected to AMT lose their SALT deduction as one of the impacts of falling into AMT. If the SALT deduction cap were to be raised, many more taxpayers would be able to deduct SALT up to the cap, instead of losing the SALT deduction entirely if they were subjected to AMT under the lower income thresholds prior to the TCJA.

Repealing or temporarily raising the SALT deduction cap before lawmakers adjourn for the year will be a difficult, if not impossible, task. As with so many other issues before leadership in Washington, the issue is partisan. Democrats backing the bill are eager to show constituents they are listening to their concerns, while Republicans want to preserve the changes instituted by the TCJA. Even if the bill gains enough support in the House to pass, it will likely not see a vote on the floor of the Republican-controlled Senate.

Given the seemingly never-ending volatile political climate, we are always available to discuss the impact of changing or proposed legislation on your personal or business tax situation.

For Further Information

If you would like more information about this topic or your own unique situation, please contact Luke J. Bartlinski, CPA, MST, Philip Liotta, CPA, or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.