One of the most controversial provisions of the Tax Cuts and Jobs Act, enacted in December, 2017, was the cap imposed on the itemized deduction for individuals associated with the payment of state and local taxes. Limited to just a $10,000 deductible amount for calendar tax years 2018 through 2025, the capped deduction includes all otherwise deductible taxes, including state income tax, local income tax and real property taxes.
The newly imposed cap hurt high tax jurisdictions the hardest, essentially making the high tax rates already levied in those jurisdictions more economically costly to the taxpayers because of the loss of the federal income tax savings previously associated with the deduction of those taxes. The taxpayers hurt most by the limitations are those living in high income tax states such as Illinois, New York, Connecticut and California, as well as those living in the largest cities where real estate taxes are high, including Chicago, New York, New Jersey and San Francisco.
The cap on these deductions has been a source of angst for many politicians representing constituents in these jurisdictions. Interestingly, Democrats have largely voiced criticism of the SALT cap ever since.
Any proposed changes to the SALT Cap likely DOA in Senate
Recently, Democrats have floated several proposals for “undoing” the TCJA’s SALT cap. One proposal would repeal the SALT cap and raise the top income tax rate from 37 percent to where it previously sat at 39.6 percent.
However, to many, the Democrats’ push-back on the SALT cap is considered on Capitol Hill to be geared more toward symbolism than actual legislative change. At this time, any Democratic-backed measure to repeal or scale back the SALT cap would almost certainly be “dead on arrival” in the Republican-controlled Senate.
Joint Committee on Taxation Estimates
Notably, the nonpartisan Joint Committee on Taxation (JCT) estimated in a June 2019 report that repealing the SALT cap would almost exclusively benefit taxpayers with incomes of at least $100,000. Thus, the political difficulty facing Democrats is that only the wealthiest of their constituents would benefit from an elimination of the cap.
Further, JCT’s estimate of the distributional effects of repealing the SALT cap beginning in 2019 highlighted that over $40 billion of the associated tax cut would go to taxpayers with incomes of at least $1 million.
Thus, the political difficulty facing Democrats is that only the wealthiest of their constituents would benefit from an elimination of the cap. Protecting high net worth individuals living in a $5,000,000 condominium in San Francisco tends to send a mixed message from the party.
Closing Note
It seems unlikely to us that any changes of significance relating to the current $10,000 cap for these taxes will be forthcoming in 2019. While the effort may be made in the coming weeks to suggest through legislation that the SALT cap be dropped, as noted above, Republicans in the Senate are not likely to vote for passage. Certainly, if any bill were to successfully get through the Senate, the President is not going to sign any bill that contravenes his original intentions in the Tax Cuts and Jobs Act at this point in time.
For interested readers, the Joint Committee on Taxation has produced a document referenced as JCX-35-19 that is titled, Background On The Itemized Deduction For State And Local Taxes.
Questions and comments can be sent to Bob Grossman or Don Johnston.
