Democrats will soon have the balance of power needed to lift President Donald Trump’s restriction on valuable tax deduction, but doing so will likely require a tricky procedural process and a politically charged vote.
Few issues that have upset certain sections of the Democratic Party more than Trump’s State and Local Tax Depreciation (SALT) cap. Repeal, however, would require the Democrats to vote for what is widely viewed as a tax cut for the rich, while the party proposes tax increases to make the Internal Revenue Service code more progressive.
Democrats have been trying to restore unlimited SALT deductions since the 2017 tax bill capped the benefit at $ 10,000. Lawmakers from high-tax countries, including New York, California and New Jersey, where the tax break is particularly valuable, opposed the move, saying it would punish their constituents for paying Trump’s $ 1.5 trillion corporate and rich tax cut.
New York Senator Chuck Schumer, who will become the chamber majority leader thanks to the victories of Raphael Warnock and Jon Ossoff in this week’s Georgia runoff elections, said last year that the removal of the SALT withdrawal cap would be his top priority .
Donald Trump signs the tax reform law in the Oval Office in December 2017.
Photographer: Chip Somodevilla / Getty Images
“If we are in the majority, we will do it permanently,” said Schumer at a press conference on Long Island in July. His office did not immediately respond to a request for comment.
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Senator Ron Wyden, an Oregon Democrat willing to oversee the finance committee, said in a statement that he would seek to lift the SALT cap as part of a broader tax agenda.
The policy is simple for lawmakers in high-tax states, where many residents saw their deductions decrease after the 2017 tax overhaul, but for Democrats in low-tax or non-tax states where few voters have more than $ 10,000 in state income and property taxes owe this is more difficult.
It’s even more difficult because it largely benefits the richest Americans when taxpayers can write off their full SALT bills. About 52% of the benefits of the cap being lifted will go to households earning at least $ 1 million a year, according to the non-partisan mixed tax committee.
Because of this, it has gained a reputation among Washington economists and politicians across the political spectrum for being a stupid idea. Jason Furman, former economic adviser to President Barack Obama, called the restoration of the full tax break a “waste of money”.
“At best, the SALT deduction is a distorted way of engaging in social policy. in the worst case it is a politically motivated handout to the richest people in the richest places, ”wrote two researchers from the Brookings Institution in a report last year. “Either way, it’s bad policy – especially in times of increasing inequality.”
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Still, Democrats are thrilled with the opportunity to restore a tax break they believe was included in the 2017 tax bill by Republicans to hurt taxpayers in their Democratic counties, including middle-income earners in housing-proof areas expensive and taxes are high. Liberals see the cap as part of a broader Conservative strategy to undermine support for progressive agendas.
“With Democrats in complete control of the federal government and New York’s Senator in charge of the Senate’s agenda, our chances of giving middle-class New Jersey tax breaks have never been better,” Representative Bill Pascrell said in one Explanation. “I am already working with my colleagues in the delegation who are working to restore the SALT deductions that Republicans stole from our neighbors in their 2017 tax fraud.”
New York Democrat Tom Suozzi is among the lawmakers leading the charge to lift the cap. He said he wanted to save it in its entirety.
“The SALT deduction is based on fundamental fairness,” said Suozzi. “You shouldn’t be taxed on taxes you’ve already paid.”
“The second part of the fairness problem is that state and local governments have operated under this paradigm for a hundred years,” he added.
In order to lead the vote through the House of Representatives and the Senate, the lean democratic majorities in both chambers must remain united in what is probably a complex and comprehensive economic policy bill.
The SALT repeal would likely be bundled with dozens of other tax and spending regulations in what is known as a Budget Adjustment Act, an expedited process for passing laws that require a simple majority rather than the normal 60-vote threshold provided by the Senate.
That way, the Chamber’s 50 Democrats, coupled with a groundbreaking vote by soon-to-be Vice President Kamala Harris, could pass the laws without Republicans having to register.
Democrats have a long trail of defeat trying to get rid of the SALT cap. New York Governor Andrew Cuomo went to court to invalidate the law. The blue state governors, including Cuomo, then attempted to use the judicial system to enact regulations regarding the cap. So far, both efforts have failed.
The House Democrats successfully passed a short-term lifting of the SALT ceiling in 2019, but the Senate ignored this.
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Democrats could opt for a full restoration of the SALT tax break, which would mitigate the disproportionate share of the richest earners, said Seth Hanlon, a senior fellow at the Center for American Progress.
“For example, the ceiling could be raised but not lifted, or Congress could only extend the ceiling to households with a certain income level,” he said. “These options would cost a fraction of the sales of the entire SALT cap removal and would be aimed at middle-class families.”
A more generous SALT break could also come with tax hikes for top earners, which would limit some of the savings they would receive.
A reversal of the SALT cap could also have unintended consequences for the Treasury and Treasury, another Democratic concern. When the cap on SALT deductions came into effect, it sparked a record-breaking municipal bond buying frenzy, with investors turning to tax-free securities to ease their tax burdens. Removing the cap could do the opposite – slightly dampening high-tax markets like New York and California.
The reversal would be slightly positive at the local level and negative for states both grappling with the economic fallout from the coronavirus pandemic, said Barclays Plc strategist Mikhail Foux.
– With the support of Nic Querolo.
How to contact the reporters on this story:
Laura Davison in Washington at ldavison4@bloomberg.net;
Kaustuv Basu in Arlington at kbasu8@bloomberg.net
To contact the editors responsible for this story:
Joe Sobczyk at jsobczyk@bloomberg.net
John Harney, Joe Schneider
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