SALT Watch: Trump onboard for removing the cap?
SALT is going to be the big theme this year, and will have to be dealt with
My representative, Mike Lawler is in the mix.
22 Jan 2025, MarketWatch: Trump now backs repeal of cap on ‘SALT’ deductions, says New York Republican. Taxpayers in these states could benefit.
President Trump’s support for abolishing a cap on deductions for state and local taxes could go a long way in negotiations over a tax-reform bill this year, even as most Republicans support the policy.
That’s according to statements by Rep. Mike Lawler, a New York Republican who has led the charge within his party to repeal the $10,000 cap on deductions on federal income-tax returns of state and local taxes paid. The cap was a key component of the 2017 Tax Cuts and Jobs Act, helping to fund tax cuts for businesses and many individual taxpayers.
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“The president’s support for this has been critical,” Lawler said Wednesday morning at an event on tax reform staged by Politico.
“He said during the campaign that he wanted to lift the cap on SALT. We met with him a little over a week ago at Mar-a-Lago, the [Republican] members from New York, New Jersey and California, and we discussed the issue of SALT,” he said.
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Lawler said Wednesday that Trump had “reaffirmed his support” for reverting to an unlimited deduction for state and local taxes — such as property taxes, which can easily run tens of thousands of dollars annually for even middle-class homeowners in many metro areas — even if the president also recognized that a cap on SALT deductibility may again be necessary to keep budget deficits under control.
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The SALT cap is estimated to increase federal revenues by about $1.2 trillion over 10 years, according to the Committee for a Responsible Federal Budget — but it’s a tax increase that hasn’t sat well with Republican lawmakers, among others, from high-tax states including New York and California, as well as Connecticut, New Jersey, Illinois and others.
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Trump and congressional Republicans face the difficult task of making the 2017 individual tax cuts permanent — the individual cuts, unlike those for businesses, were set in 2017 to sunset in order to ease the legislation’s passage — while lifting the SALT cap and addressing other Trump campaign promises such as eliminating taxes on tips and Social Security.
The CRFB estimated that the cost of all of Trump’s campaign promises could reach as high as $15.6 trillion when the federal government is already running a historic budget deficit as it battles high interest rates and inflation.
This ain’t a great idea.
The above does not discuss the Alternative Minimum tax (AMT). I was hit with the AMT a few times before the Trump tax cuts.
Putting the SALT deduction back in its full glory, and also putting back the AMT and higher marginal tax rates will not help us high-income folks in high-tax states.
And yes, they would probably need to increase tax rates somewhere to make it all work out.
Spreading the SALT Around
Let’s look at other commentary on getting rid of the SALT cap.
Richard Rubin, WSJ, 22 Jan 2025: The $10,000 SALT Cap Is Likely Dead. What Will the New Cap Be?
WASHINGTON—The $10,000 cap on state and local tax deductions likely won’t survive after this year, because the lawmakers who hate it the most have the ability to kill it. But what comes next?
House Republicans are trying to figure out what replaces the so-called SALT cap for residents of high-tax states such as New York, New Jersey and California who have seen a tax hit from the limit.
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All sorts of ideas on the SALT cap are in the mix as Republicans wrap up the details of their broader tax overhaul. They aim to pass a major tax bill without Democratic help this spring, but it could take longer. The real deadline is Dec. 31, when significant pieces of the 2017 tax law expire, including the cap.
As with many tax provisions, the SALT cap can be adjusted in several ways, each with consequences for federal revenue and who is affected. Some have proposed full repeal of the cap, which even supporters concede is politically unlikely. Rep. Mike Lawler (R., N.Y.) has proposed a new $100,000 level for individuals and $200,000 for married couples, up from the current $10,000. Van Drew said he would support a new cap somewhere in between those levels.
Rep. Nicole Malliotakis (R., N.Y.) argues that the new cap should be indexed to inflation, unlike the current fixed cap that has pinched harder over the past eight years as state taxes and incomes have climbed.
Congress also could set an income limit for the deduction to prevent the highest earners from benefiting. It could double the deduction for married couples; the $10,000 currently applies regardless of filing status.
Something less than full repeal of the SALT cap could be workable.
Richard Rubin looks at all the different balancing acts that could be achieved, depending on how much they want to “give away”.
Unlike the first piece I linked, Rubin does address the AMT in his piece:
[Malliotakis] and Garbarino said Congress should prevent the alternative minimum tax from coming back in full force as a way to pay for other cuts. Before the 2017 law, the AMT operated as a parallel tax system that acted as a backstop to the regular tax rules and denied the deduction for state and local taxes; it hit many households making between $250,000 and $750,000 in high-tax states.
“We’re not bringing back SALT just so you can hit us over the head with something else,” Garbarino said.
It is all so complicated, isn’t it?
Perhaps simplification, such as not including SALT at all in the calculations, would make everything so much easier.
(SALT CAP ZERO!)
Many Republicans argue that the SALT deduction effectively serves as a subsidy for high-tax states, because their state governments can raise taxes and have the federal government pick up part of the cost through the deduction. That pro-cap argument still holds sway for most Republicans, many of whom have welcomed the migration of some high-income residents to their lower-taxed states.
Blue-state GOP lawmakers emphasize that Republicans living in New York and New Jersey don’t control their state governments. Van Drew said lawmakers from those states have been willing to support other members’ priorities.
“Face it, we subsidize corn and we help farmers,” Van Drew said. “And I have no problem with that.”
Yes, as a Republican in New York, I don’t have a huge amount of influence on our tax levels here. But if the SALT cap were zero, it would definitely rein in the ability of the state and local politicians to hike up taxes, as they’d know nobody could use it as deductions. It would be a way to control those politicians.
Just a thought.
In any case, the point being made is that there is an important group of Congressional Republicans who represent districts such as mine, and they do make the difference with respect to the balance of power in the House of Representatives. They have leverage.
And there is a real deadline: December 31 this year.
ITEP Analysis
In my prior post on SALT, I linked to the Committee for a Responsible Federal Budget’s own take on different possible SALT cap options.
Let’s look at another group: Institute on Taxation and Economic Policy.
17 Jan 2025: Different Approaches to the Trump Tax Law’s Cap on Deductions for State and Local Taxes (SALT)
I wish this table came with three columns, because it would be easier to explain. The two columns in this table differ by $349 billion. Every single item. (Except one row, where they screwed up…but I’ll give them a pass on that.)
The $349 billion is their estimate of the worth of the extension of all the other elements — the standard deduction, the marginal tax rates, etc. Here is the list via Brookings: Which provisions of the Tax Cuts and Jobs Act expire in 2025?
And they’re only looking at modeled revenue for a single tax year: 2026.
The items on the right are supposed to show the “worth” of the different variations of mucking about with the SALT cap.
They have some other tables, indicating who gets the benefit of the tax cuts, but unsurprisingly, those paying the most taxes get the most in cuts, so you can go there if you want to see that unsurprising result.
Their main argument:
Of course, none of these proposals would change the fundamental fact that extending all the temporary Trump tax provisions would mainly benefit the rich unless other changes are made to dramatically limit tax breaks for those with the highest incomes.
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Under any of these approaches, about half the benefits or more will flow to the richest 5 percent of taxpayers. Between 22 percent and 30 percent of the benefits will flow to the richest 1 percent alone, depending on which approach is taken. Extending the Trump tax law will make our tax code less fair under any path that Congressional Republicans are considering right now.
Again, who do you think is paying the taxes?
(And it’s not “richest” — it’s highest-income. Let us distinguish, please.)
From a public finance point of view, I just care about how sustainable the revenue stream is. I don’t want the federal revenue to be too dependent on those 5%, of course.
There is a lot more going on right now as Trump is getting “settled” in for his second term. The real deadline for getting all the tax stuff hashed out is by the end of the year.
So I have this entire year to write about this, probably.
Yay.
So complex.Thanks for this discussion.