Debate over SALT deduction forges odd alliances

Debate over SALT deduction forges odd alliances
© Greg Nash

The congressional debate over the cap on the state and local tax (SALT) deduction is creating unusual combinations of groups advocating for and against repeal of the $10,000 limit.

Labor unions and some business groups back repealing or lifting the cap, while liberal and conservative think tanks are against completely doing away with the limit.

The advocacy efforts come as Democrats work to figure out how they want to tackle the issue, which divides lawmakers in the party, in forthcoming legislation on President BidenJoe BidenUkraine's president compares UN to 'a retired superhero' Biden touts 'progress' during 'candid' meetings on .5T plan Biden to tap law professor who wants to 'end banking as we know it' as OCC chief: reports MORE’s economic agenda.

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The Biden administration has not released a proposal concerning the cap but has said it’s open to working with lawmakers on the matter.

Treasury Secretary Janet YellenJanet Louise YellenSenate confirms Biden nominee for top Treasury tax position The Hill's 12:30 Report - Presented by Facebook - Biden meets with lawmakers amid domestic agenda panic Trump: GOP would be 'foolish' not to use debt ceiling in negotiations MORE said at a House hearing in June that Biden “recognizes that it’s a tremendous concern in a number of states, and wants to work with Congress to see if there’s a way to mitigate the harms that it’s caused.”

The $10,000 SALT deduction cap was created by the GOP’s 2017 tax-cut law as a way to raise revenue to help offset tax cuts elsewhere in the expansive bill.

It has been controversial ever since it was first proposed, with politicians on both sides of the aisle in high-tax, Democratic-leaning states such as New York, New Jersey and California arguing that it harms their states and residents.

The debate over the SALT deduction cap has heated up again in recent months. Some Democrats in high-tax states are threatening to vote against legislation based on Biden’s economic proposals if it doesn’t include full repeal of the cap. But Republicans generally want to keep the cap in place, and some progressives don’t want to fully eliminate it for the highest-income households.

While Democrats are planning to pursue a bipartisan infrastructure bill and a Democratic-only legislation focused on issues such as education and child care, it is unclear whether changes to the SALT cap will make it into either measure.

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A key challenge is the cost, with the right-leaning Tax Foundation estimating that full repeal of the cap would cost about $380 billion from 2022 through 2025. The cap is currently set to expire after 2025.

A draft document circulated last week stated that a budget being prepared by Senate Budget Committee Chairman Bernie SandersBernie SandersBiden touts 'progress' during 'candid' meetings on .5T plan Manchin: Biden told moderates to pitch price tag for reconciliation bill Biden employs flurry of meetings to unite warring factions MORE (I-Vt.) would include $120 billion for the SALT cap issue but does not include additional details.

Outside groups are seeking to influence negotiations on the issue. 

“There shouldn’t be any federal law or regulation that should limit or interfere with the constitutional or statutory rights of local governments to develop and operate their own tax systems that really benefit their constituents,” Irma Esparza Diggs, senior executive and director of federal advocacy for the National League of Cities, told The Hill prior to speaking at a virtual event Wednesday held by Reps. Thomas Suozzi (D-N.Y.) and Young Kim (R-Calif.).

Powerful labor unions that helped Democrats win control of Congress and the White House have emerged as some of the most vocal proponents of the repeal.

American Federation of Teachers (AFT) President Randi Weingarten told The Hill that the repeal is a top priority for her union, which represents 1.7 million school workers. She said school districts in high-tax states were already feeling the effects of the limit shortly after former President TrumpDonald TrumpUkraine's president compares UN to 'a retired superhero' Collins to endorse LePage in Maine governor comeback bid Heller won't say if Biden won election MORE signed the tax bill into law in December 2017.

“We’re pushing to get the full deduction restored because the SALT cap was a terrible disincentive to the investments that communities need to make, and it’s created a big tax burden on the middle class,” Weingarten said. 

AFT is working to solidify Democratic support for the measure after 16 Democrats, including Rep. Alexandria Ocasio-CortezAlexandria Ocasio-CortezWHIP LIST: How House Democrats say they'll vote on infrastructure bill Feehery: The confidence game Democrats face full legislative plate and rising tensions MORE (D-N.Y.), voted against a temporary repeal in 2019. Progressive lawmakers have noted that wealthy Americans would receive most of the benefits if the SALT cap were lifted.

“If you look at the aggregate numbers for the whole country, it would look different than what the real impact is,” Weingarten said. “While there are some wealthier people who got the benefit as well, this is really a punch in the gut to the middle class and communities that invest in themselves.”

Teachers unions were among Biden’s top labor backers, along with the American Federation of State, County and Municipal Employees (AFSCME).

AFSCME President Lee Saunders said the repeal is critical for state and local governments, which were battered by the pandemic before receiving huge amounts of aid in Biden’s $1.9 trillion relief bill.

“The pandemic revealed just how underfunded states, cities and towns have been, and how desperately we need investments at the local level to build up our public health workforce, rebuild our nation’s infrastructure, improve the unemployment system, and ensure we are prepared for future crises,” Saunders said.

The push for a full repeal is also getting a boost from the National Association of Police Organizations, a union that has clashed with Democrats on policing issues but is now relying on the party and a small number of blue-state Republicans to back the measure.

“We very much view this as a middle-class, blue-collar employee issue, that our people have had their taxes raised and are not able to afford the communities they live in anymore,” said Andrea Edmiston, the group’s director of government affairs.

While labor unions and business groups are often on the opposite sides of issues, some business groups are aligned with public-sector unions on the SALT deduction cap issue.

Some local chambers of commerce in high-tax states argue that reversing the cap would encourage business development in their areas. Additionally, the National Association of Realtors (NAR) has been arguing that the cap hurts homeowners and has helped to discourage Americans from buying their first homes.

“In short, the limit makes it more expensive to purchase and own a home,” NAR President Charlie Oppler said. “And because of its disproportionate impact on areas where the costs of living are highest, countless middle-class Americans are feeling the effects of the cap.”

The realtors group supports fully repealing the SALT cap but acknowledges the political challenge of getting that measure passed. NAR is lobbying lawmakers to back a more incremental measure to raise the cap for married couples to $20,000, which would provide tax relief for millions of homeowners.

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While a wide array of groups back repealing the SALT deduction limit, officials at think tanks and advocacy organizations across the ideological spectrum are warning lawmakers against including repeal of the cap in legislation this year, arguing that repealing the cap largely benefits high-income households. 

“This is something that we intend to talk about a lot because it indicates a lot of hypocrisy on the left,” said Brandon Arnold, executive vice president of the right-leaning National Taxpayers Union.

Americans for Tax Reform President Grover Norquist argued that residents of high-tax states should be expressing frustration with their state governments over their tax burdens, rather than focusing on the SALT deduction cap.

“If you’re in New York and California, don’t get mad at Republicans in Washington, get mad at your governor,” he said.

Experts at left-leaning think tanks, including the Institute on Taxation and Economic Policy and the Center for American Progress, have also raised concerns about repealing the SALT deduction cap without any sort of replacement because doing so would benefit the wealthy.

Conservatives said they’d be open to working with liberal groups on the issue.

“We’d be happy to team up with any groups on the left,” Arnold said.