By David Lightman, The Sacramento Bee (TNS)
It seems like such a simple, politically appealing idea: Get rid of the limit on how much people can deduct for state and local taxes on their federal returns.
A lot of Californians would save money—those with high incomes would benefit the most—and the prospect of a change seems tantalizingly close. As part of the behind-the-scenes maneuvering that culminated in Louisiana Rep. Mike Johnson’s election as House speaker last month, some Republicans with votes crucial to the outcome say they were told he would look into the matter.
“He acknowledges that providing SALT (state and local tax) relief is critical for middle-class Americans burdened by double taxation and must be addressed in any tax bill the House considers,” said Rep. Andrew Garbarino, R-New York, when he announced his support for Johnson last month.
Rep. Anthony D’Esposito, R-New York, tweeted he had engaged in “productive discussions with Speaker Mike Johnson about advancing New York’s legislative priorities, and I will work with the Speaker on including SALT relief provisions in the upcoming tax package.”
The congressman told News12 Long Island that Johnson “made a commitment to us” that as part of any tax package “he would include some sort of relief for SALT.”
No one has publicly discussed any specifics, and Johnson’s office would not offer any details or comment to The Bee.
A change in the SALT cap would be a huge benefit to Californians and people in other higher-tax states. But while it solves one political problem, helping middle class taxpayers, it also creates another—it disproportionately benefits higher income taxpayers.
Currently, people can deduct up to $10,000 per federal return for state and local taxes they paid during the year.
The amount was unlimited until it was capped in the Republican-authored 2017 tax bill. The limits are scheduled to generally end after the 2025 tax year.
The ceiling was seen as a way to provide revenue to help pay for other tax cuts. It was also regarded as politically safe for most Republicans, since people most affected by the limit lived in Democratic states.
Higher taxes in California
A study by the nonpartisan Tax Policy Center found that 19 of the 20 congressional districts where the most taxpayers relied on a SALT deduction in the years before the cap were held by Democrats. Two were in California—the Los Angeles area district that includes Beverly Hills and another that takes in Palo Alto, Stanford and parts of San Jose.
Statewide in California, the bottom 40% of taxpayers, those earning less than $51,700, would see no benefit, according to 2022 estimates by the Institute on Taxation and Economic Policy, a Washington-based economic analysis firm. The wealthiest taxpayers would get the biggest breaks.
ITEP’s estimates of the impact of repeal on California taxpayers (all figures are averages):
- Income between 0 and $51,700 (lowest 40% of incomes), average tax change is zero.
- Between $51,700 and $83,200 (middle 20% of incomes), $30 saved per tax return.
- Between $83,200 and $151,100, (fourth 20% of incomes), $410 per return.
- Between $151,100 and $358,700 (next 15% of incomes), $2,570.
- Between $358,700 and $992,800, (next 4% of incomes), $10,690.
- Above $992,800 (top 1% of incomes), $98,650.
In recent years, lawmakers have proposed setting limits for those earning more than middle-class incomes. Two years ago, the House considered a measure to increase the deduction limit to $80,000 as part of President Joe Biden’s big social spending plan. It got nowhere, notably because the Senate balked at the idea of giving the rich a tax break.
Congress’ reluctance
A lot of the same hurdles remain before any changes could be made.
First, changing the limit would probably have to be done as part of broad tax legislation. While lawmakers have been seriously discussing a tax bill all year, they’ve been more consumed with simply keeping the government open and funded.
“I don’t see how you build political momentum” for a change in the SALT cap, said Rep. Jim Costa, D-Fresno, who supports a change.
Second, getting spending and deficits down remains a big priority—and lifting the cap goes in the other direction.
In California alone, eliminating the cap would have cost about $33 billion last year, ITEP estimated.
“It’s a giveaway to the rich,” said Howard Gleckman, senior fellow at the Tax Policy Center in Washington. He estimated that nationally, 93% of those making $1 million or more would get a tax cut averaging about $48,000.
But Johnson, who has never held a major leadership position in Congress or chaired a committee, did express sympathy for the idea of raising the limits. And no one really knows just how he’ll proceed on anything.
“I think everything is so fluid in terms of understanding where the speaker is at where he’s going to be headed on issues,” said Rep. Salud Carbajal, D-San Luis Obispo.
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©2023 The Sacramento Bee. Visit sacbee.com. Distributed by Tribune Content Agency LLC.
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Tags: State and Local Taxes, Taxes
