The tax provision that's become a sticking point in infrastructure talks
As Democrats and Republicans hash out infrastructure plans, a tax deduction unrelated directly to roads, bridges, airports or other traditional infrastructure is a front and center sticking point in what's already anticipated to be a complicated negotiation process moving forward.
The state and local tax deduction cap — commonly known as SALT — was enacted as part of President Donald Trump's 2017 tax reforms. Taxpayers can deduct up to $10,000 of the state and local taxes they have paid on their federal income tax return. For married couples filing separately, it's a $5,000 cap. Previously, they could deduct the full amount.
Tax experts say removing the cap would largely benefit wealthier Americans, but the people affected by it predominantly live in blue states. Some House Democrats have already said point-blank there would be "no deal" if the infrastructure package did not include repealing of the cap as part of the legislation.
Republican senators unveiled their own infrastructure framework Thursday in response to President Biden's American Jobs Plan. It specifically calls for preserving the cap.
The center-right Tax Foundation estimates repealing the cap — set to expire in 2025 — would reduce federal revenues by about $380 billion over 10 years. It also found the top 1% would get to keep 2.8% more in their after-tax income, while the bottom 60% would see nearly no benefit with a repeal.
The left-leaning Tax Policy Center similarly found 96% of the benefit from repealing the cap would go to the top 20% of households; 56% of the benefit would go to the very top 1%.
But the cap's impact depends on the state the taxpayer lives in. States where people make more money tend to have higher taxes — meaning those taxpayers end up with a greater tax burden if they can't deduct their state and local taxes. Similarly, states with higher property values have higher property tax rates, so the cap affects taxpayers living in those states more.
"Even if it's an identical home in New Jersey versus Kansas, you're more likely to be in a situation where you're going to hit that cap in New Jersey," said Garrett Watson of the Tax Foundation. "It's a really wide difference which makes it harder to get to an agreement about this deduction because people's experience of it is so different."
The Tax Foundation found the SALT deduction was more valuable in places like California, New York, New Jersey, Maryland and Virginia. It's less valuable in North and South Dakota or Wyoming.
After the GOP senators released their infrastructure plan, New Jersey Democratic Congresswoman Mikie Sherrill called the plan a non-starter, specifically taking aim at its restriction on the SALT dedication.
"It pointedly excludes a change to the SALT deduction cap which leaves out crucial relief for middle class families in my district," she said in a statement. "With the backing of our recently announced bipartisan SALT Caucus in the House, it's more apparent than ever that any package that does not address the SALT deduction cap will not move."
The White House has indicated it is open to repealing the SALT deduction cap but lawmakers would have to come up with a way to offset the increased loss in revenue.
On Wednesday, Congressman Josh Gottheimer sent a letter to Treasury Secretary Janet Yellen urging the repeal of the SALT deduction cap. The New Jersey Democrat said it could be paid for by closing the tax gap, noting the IRS commissioner recently suggested as much of $1 trillion in taxes are not collected annually.
"Shrinking the tax gap would not only fund the full return of the SALT deduction to the hardworking families of New Jersey, but it would also provide substantial resources for infrastructure spending and encourage long-term tax compliance," he wrote. "All of this would be accomplished without raising rates on families or complexity in the tax system, and not risk jeopardizing our economic recovery as we work to get through the COVID-19 pandemic."
Democrats currently hold only four seats more in the House than Republicans, meaning there's almost no path forward on infrastructure without either bipartisan support or getting all but two members of the Democratic caucus onboard.
