Capitol Alert

Democrats will push to restore California tax deductions

One of the most contentious fights of Republicans’ 2017 tax overhaul is about to go another round.

Democrats from high-tax states — including California — are preparing to launch a new push to restore the state and local tax deduction, which the 2017 law capped, when Democrats take control of the House next year.

The SALT deduction, as it’s known, allows taxpayers to subtract state and local income, sales and property taxes from their federal tax payment, as part of their itemized deductions. It’s especially popular in states where local taxes and the cost-of-living are high. Members of Congress from those states — particularly New York, New Jersey and California — protested the cap, which allows people to deduction up to $10,000 of state and local taxes. But they failed to strip it from the 2017 law.

With Democrats in the majority in the House next year, however, SALT’s top defenders are ready to take another swing. And they are hoping that, as taxpayers begin to file their returns under the new rules in the coming months, the backlash will give their effort a political boost.

“I think we’re in for an interesting filing season,” said Jack Peterson, associate legislative director at the National Association of Counties.

Leading the charge on legislation to renew SALT is New Jersey Rep. Bill Pascrell, a senior Democrat on the powerful Ways and Means tax writing committee. “We’re working on it now,” said Pascrell, adding that the move is “a priority” for the committee.

“We’re going to have hearings on it,” said Democratic Rep. Mike Thompson of St. Helena, another senior Ways and Means member. “We’re going to look into the whole tax code and see what we need to do” to adjust the Republican-backed law.

Given the partisan divided in Congress, it’s unlikely lawmakers will be able to pass new SALT provisions in 2019, but proponents of the deduction want to lay the groundwork for a deal in the coming years. They have some leverage: the $10,000 cap on the deduction, like most of the rest of the individual tax changes in last year’s law, expire in 2025. But that also means the pressure to address the issue is still several years away.

“Congress being Congress, it’s unlikely that they’re going to deal with any of it until 2025,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. The politics around SALT are also complicated, dividing politicians not just along party lines but also geographically. According to the nonpartisan Tax Foundation, just six states – California, New York, New Jersey, Illinois, Texas, and Pennsylvania – claimed more than half of the value of all SALT deductions nationwide. California alone was responsible for nearly 21 percent of all SALT deductions.

“Obviously the SALT cap was a big deal in suburban districts in blue states,” says Gleckman. Many New York and New Jersey Republicans vehemently opposed the cap and voted against the 2017 tax overhaul as a result. Most California Republicans, however, voted for the legislation, under pressure from GOP leadership, including Bakersfield Republican Kevin McCarthy.

As Thompson pointed out, a lot of those suburban Republicans were swept out in the November election (regardless of whether they voted for or against the law).

“I think their constituents recognized that they were not voting or working in their interests,” he said. For Democrats that represent other, low-tax parts of the country, meanwhile, the SALT deduction isn’t nearly as big a priority. And as Gleckman notes, eliminating the cap “kind of fights the Democratic message.” “They’re saying what they want to do is cut taxes for the middle class and give working people a better deal,” he continued. But “most of the benefit of repealing the (SALT) cap goes to high income people.”

According to California Franchise Tax Board, approximately 2.6 million taxpayers deducted more than the $10,000 limit in state and local taxes in 2015. Of that group, about 1 million will owe more in taxes in 2018 — to the tune of $12 billion. About $9 billion of that will be paid by about 43,000 Californians who make $1 million or more.

But some middle-class taxpayers are likely to pay more, too. According to tax board estimates, 751,000 California households with incomes under $250,000 will probably owe a combined $1.1 billion. And given the high cost of living in the state, $250,000 does not feel like nearly as much money as it does in other parts of the country.

Defenders of the SALT deduction argue that it also enables state and local governments to implement more progressive tax systems and fund more local services. Peterson said county officials are concerned that as residents realize their tax bill is going up, they will begin to complain to their local leaders.

“It puts a pressure on our members and certainly down the road financial pressure,” he said. “It’s a local control issue.” That’s the message that Pascrell and other Democrats who want to reinstate SALT are hoping to communicate to colleagues in 2019. And, he predicted, “we’re going to have a little debate about … it.”

Emily Cadei works out of the McClatchy Washington bureau, where she covers national politics and writes the Impact2020 newsletter. A native of Sacramento, she has spent more than a decade in D.C. reporting on U.S. elections, Congress and foreign affairs for publications including Newsweek, Congressional Quarterly and Roll Call.