Senate rejects Dem measure to overturn IRS rules on SALT deduction cap

Senate rejects Dem measure to overturn IRS rules on SALT deduction cap
© Greg Nash

The Senate on Wednesday rejected a Democratic effort to overturn IRS regulations blocking workarounds to a portion of President TrumpDonald John TrumpNew Bob Woodward book will include details of 25 personal letters between Trump and Kim Jong Un On The Money: Pelosi, Mnuchin talk but make no progress on ending stalemate | Trump grabs 'third rail' of politics with payroll tax pause | Trump uses racist tropes to pitch fair housing repeal to 'suburban housewife' Biden commemorates anniversary of Charlottesville 'Unite the Right' rally: 'We are in a battle for the soul of our nation' MORE’s tax law that is disliked by high-tax states.

The Senate voted against the Democrats’ resolution, introduced by Minority Leader Charles SchumerChuck SchumerOcasio-Cortez's 2nd grade teacher tells her 'you've got this' ahead of DNC speech New poll shows Markey with wide lead over Kennedy in Massachusetts Lawmakers push Trump to restore full funding for National Guards responding to pandemic MORE (D-N.Y.), by a vote of 43-52. It was a mostly party-line vote, with Sen. Michael BennetMichael Farrand BennetKamala Harris makes history — as a Westerner Expanding our health force can save lives and create jobs simultaneously How Congress is preventing a Medicare bankruptcy during COVID-19 MORE (Colo.), a 2020 presidential candidate, the only Democrat to vote against the resolution and Sen. Rand PaulRandal (Rand) Howard PaulWatchdog calls for probe into Gohmert 'disregarding public health guidance' on COVID-19 Massie plans to donate plasma after testing positive for COVID-19 antibodies After trillions in tax cuts for the rich, Republicans refuse to help struggling Americans MORE (Ky.) the only Republican to vote in favor.

Among those not voting were Sens. Kamala HarrisKamala HarrisCandidates on Biden's VP list were asked what they thought Trump would nickname them as part of process: report Bass on filling Harris's Senate spot: 'I'll keep all my options open' Election security advocates see strong ally in Harris MORE (D-Calif.), Bernie SandersBernie SandersOcasio-Cortez's 2nd grade teacher tells her 'you've got this' ahead of DNC speech Trump and allies grapple with how to target Harris Chris Wallace: Kamala Harris 'not far to the left despite what Republicans are gonna try to say' MORE (I-Vt.) and Elizabeth WarrenElizabeth WarrenNew poll shows Markey with wide lead over Kennedy in Massachusetts Trump and allies grapple with how to target Harris Chris Wallace: Kamala Harris 'not far to the left despite what Republicans are gonna try to say' MORE (D-Mass.), all 2020 contenders.

While Democrats’ effort was unsuccessful, it is notable because it’s the first time they forced a vote to overturn IRS rules relating to Trump’s tax law. The vote highlights how Democrats from high-tax states — such as New York, New Jersey and California — view the tax law’s cap on the state and local tax (SALT) deduction as a top priority and the challenges they face in doing away with it.

“As bad as the Trump tax bill is for the whole country, it’s even worse for states like New Jersey,” Sen. Bob MenendezRobert (Bob) MenendezSenators ask for removal of tariffs on EU food, wine, spirits: report VOA visa decision could hobble Venezuela coverage Bottom line MORE (D-N.J.) said on the Senate floor ahead of the vote.

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The tax law Trump signed in December 2017 imposed a cap on the SALT deduction of $10,000. 

Republicans capped the deduction in order to raise revenue to pay for tax cuts elsewhere in the law, and because they viewed the deduction as subsidizing higher state taxes. They have noted that analysts have estimated that most people got a tax cut for 2018 under Trump’s law, even in high-tax states.

Efforts to repeal the SALT deduction cap have also faced criticism among progressives, because analysts across the ideological spectrum have estimated that repealing the SALT deduction cap would primarily benefit high-income taxpayers.

But the cap has been one of the most controversial portions of the GOP tax law, with policymakers in some blue states arguing that it unfairly punishes their residents with high property taxes and will make it harder for their states to offer public services to their residents.

Several GOP House members from New York, New Jersey and California joined with Democrats in voting against the tax law due to concerns about the SALT deduction cap, though no GOP senators hail from those states and no Republican senator voted against the final version of the 2017 law.

In the 2018 midterm elections, Democrats flipped a number of House seats in affluent, suburban areas where residents had relied heavily on the SALT deduction before the GOP tax law was enacted, though the tax law wasn’t the only factor, or necessarily the driving factor, behind Democrats’ victories in those districts.

The Senate vote centered on nullifying Treasury Department and IRS rules, finalized in June, that blocked certain workarounds that blue states created to allow their residents to circumvent the SALT deduction cap. The Congressional Review Act allows Congress to vote to nullify recently finalized regulations, and senators can force a vote on resolutions under the act with the signatures of 30 members of the chamber.

Several states tried to allow residents to convert state and local taxes into charitable contributions that would still be fully deductible on federal tax returns. States authorized the creation of state and local funds that taxpayers could make donations to and receive credits against their state and local taxes.

The IRS’s rules are designed to prevent the donation-and-credit programs from being used as workarounds to the SALT deduction cap. Under the rules, taxpayers can only claim a charitable deduction for donation amounts that exceed the amount of state tax credits they received.

Democrats in high-tax states have blasted the rules as harmful to their residents. They also encouraged Republicans to join them in voting to overturn the rules, pointing out that the rules also affect donation-and-credit programs in red states that pre-date the GOP tax law.

“The regulation we will be voting on impacts state charitable credits in virtually every state — ranging in areas from education to conservation to child care and more,” Schumer said Tuesday.

But Republicans defended their tax law and blasted Democrats for focusing on making a change to the law that would help high earners.

“Rather than acknowledge that the sky hasn’t fallen, our Democratic friends still want to undermine tax reform,” Senate Majority Leader Mitch McConnellAddison (Mitch) Mitchell McConnellOn The Money: Pelosi, Mnuchin talk but make no progress on ending stalemate | Trump grabs 'third rail' of politics with payroll tax pause | Trump uses racist tropes to pitch fair housing repeal to 'suburban housewife' Pelosi, Mnuchin talk but make no progress on ending stalemate Democrats say White House isn't budging in coronavirus relief stalemate MORE (R-Ky.) said Wednesday. “Listen to this. Democrats’ first target is changing the tax code so that working families across the country have to subsidize wealthy people in states like New York, New Jersey and California.”

Senate Finance Committee Chairman Chuck GrassleyCharles (Chuck) Ernest GrassleyThe Hill's Morning Report - Presented by Facebook - The choice: Biden-Harris vs. Trump-Pence Trump grabs 'third rail' of politics with payroll tax pause On The Money: McConnell says it's time to restart coronavirus talks | New report finds majority of Americans support merger moratorium | Corporate bankruptcies on pace for 10-year high MORE (R-Iowa) called the blue states’ workarounds “state-sanctioned tax shelters.”

One Democrat took issue with the resolution to overturn the IRS rules.

Bennet on the Senate floor Tuesday called Trump’s tax law “completely misguided” and argued that the Trump administration designed the SALT deduction cap as revenge on people who didn’t vote for the president in 2016. And he called the IRS rules overly broad regulations that harmed programs that existed before the tax law was enacted. But he also said that voting to overturn the IRS rules would make Trump’s tax law worse.

“Let me be very clear: The vast majority of the benefits of repealing the SALT cap would go to high-income Americans,” Bennet said. “Repeal would be extremely costly. And for that same cost, we could finance much more worthy efforts to help working- and middle-class families all over the country.”

Democratic lawmakers representing high-tax jurisdictions have said that even if their constituents who are hurt by the SALT deduction cap have high incomes, they are still middle class because they face a high cost of living.

In the House, Democrats are also wrestling with how to address the SALT deduction cap. The House Ways and Means Committee held hearings on the topic in June, and lawmakers have formed a working group to come up with consensus legislation on the issue.

Rep. Mike ThompsonCharles (Mike) Michael ThompsonHouse Democrats unveil green tax package The Hill's Coronavirus Report: BIO's Michelle McMurry-Heath says 400 projects started in 16 weeks in biotech firms to fight virus, pandemic unemployment total tops 43 million Gun control group rolls out House endorsements MORE (D-Calif.), the leader of the working group and a senior member of the Ways and Means Committee, said Tuesday that the group is drafting legislation that he hopes will get a committee vote by the end of the year.

“We’re going to write legislation that’s paid for and legislation that addresses this mess that the Republican tax bill created,” Thompson said.

Rep. Bill PascrellWilliam (Bill) James Pascrell'This already exists': Democrats seize on potential Trump executive order on preexisting conditions Lawmakers urge administration to remove tariffs on European wine and spirits amid coronavirus pandemic The Hill's Campaign Report: Florida's coronavirus surge raises questions about GOP convention MORE (D-N.J.), another Ways and Means Committee member, suggested on Tuesday that the bill could involve increasing the cap from $10,000 to $25,000 or $30,000, but not totally repealing the cap. He suggested that the bill could be paid for by raising the top individual income tax rate.

Rohit Kumar, a former McConnell aide who now works at PricewaterhouseCoopers, said the work House and Senate Democrats are doing now on the SALT deduction is largely about “laying the groundwork” for future negotiations, as well as showing that they’re working to help their constituents.

People who feel that they were hurt by the cap “want to see their elected members fighting for them,” he said.

The SALT deduction cap hasn’t been a prominent issue in the Democratic presidential primary. While some candidates from high-tax states, such as Harris and Sen. Cory BookerCory Anthony BookerOn The Money: Pelosi, Mnuchin talk but make no progress on ending stalemate | Trump grabs 'third rail' of politics with payroll tax pause | Trump uses racist tropes to pitch fair housing repeal to 'suburban housewife' The Hill's Campaign Report: Biden, Harris make first public appearance as running mates Booker hits back at Trump tweet, mocks misspelling of name MORE (D-N.J.), have supported legislation to restore the full SALT deduction, the issue hasn’t been central to their campaign platforms, and many other candidates have not explicitly spoken about the cap. Harris' office told The Hill she would have voted for the resolution.

It’s unclear exactly when any changes to the SALT deduction cap will occur.

New York, New Jersey, Connecticut and Maryland sued to challenge the SALT deduction cap, but they lost at the district court level. New York, New Jersey and Connecticut have filed a separate lawsuit challenging the IRS rules that is still pending before a federal district court in New York.

Lawmakers will have a major opportunity to revisit the GOP tax law at the end of 2025, when the SALT deduction cap and the law’s other tax changes to the individual code expire. But a future Democratic president and Congress may want to reexamine the cap and the tax law as a whole sooner than that.

“They’re going to want to replace it with something better before the end of 2025,” said Steve Wamhoff, director of federal tax policy at the left-leaning Institute on Taxation and Economic Policy.

--Updated at 5:09 p.m.