Democrats' plan to undo President Donald Trump's $10,000 cap on the state and local tax deduction is likely to end up enshrining looser restrictions on the popular and politically important write-off for the foreseeable future.
The ongoing debate over whether to expand the deduction, or SALT, as part of President Joe Biden's economic plan has been one of the messiest spats among fractious Democrats as they try to pass a final tax and spending package in the coming weeks.
Lawmakers representing high-tax areas like New York and New Jersey are pushing to make the SALT deduction on federal income taxes a priority, while many progressive Democrats counter that amounts to giving billionaires a huge tax cut.
The compromises that Democrats are looking to reach may mean that some version of the SALT cap — currently slated to expire at the end of 2025 — may be here to stay as lawmakers trade a future of unlimited tax breaks for tax cuts now.
"An unlimited deduction is dead and the question now is what kind of limitation," said George Callas, a former House tax aide who helped write the 2017 tax law.
House Democrats have proposed increasing the cap to $80,000 from $10,000 through the end of the decade, which would actually add billions of dollars to federal coffers on paper over the period.
Senate Democrats are working on a less generous option that would phase out the SALT deduction for those with about $400,000 or more in income, though the details of that proposal haven't yet been fleshed out.
Representative Tom Suozzi, a Democrat from New York, speaks during a news conference announcing the State and Local Taxes (SALT) Caucus outside the U.S. Capitol in Washington, D.C., U.S., on Thursday, April 15, 2021.
Several House Democrats have said they won't vote for President Biden's $2.25 trillion infrastructure plan if the legislation doesn't include addressing the SALT cap.
An outright repeal of the cap — the first choice for SALT advocates including Representatives Tom Suozzi of New York and Josh Gottheimer of New Jersey — is too costly so lawmakers are looking at ways to provide a bigger tax break without adding to the deficit within the 10-year federal budget window.
Democrats have Republicans to thank for clearing the way for the budgeting tricks that will allow them to do that.
The existing $10,000 limit on SALT is scheduled to expire at the end of 2025, along with many of the other individual tax changes from Trump's 2017 tax law. Republicans were forced to include that phase-out date so that their tax cuts didn't add to the deficit beyond what was outlined within Senate rules.
The expiration means that congressional budget analysts have to assume that the cap would be fully lifted after 2025 because that is current law. As a result, if Democrats impose some sort of limit on the SALT deduction from 2026-2031, that counts as revenue for budgeting purposes that can be used to pay for a more generous SALT deduction in the short-term.
