A faction of Republican lawmakers, known as the SALT Caucus, is calling for a tax cut for residents of predominantly blue states. This move has stalled the House’s efforts to extend various tax cuts from the Trump era, reigniting divisions within the Republican Party over tax policy. The SALT Caucus is collaborating with a group of Democrats in an attempt to overturn a provision introduced in 2017 that placed a cap on the amount individuals can deduct from their federal income taxes for state and local taxes (SALT).
Under Trump’s tax law, this deduction was limited to $10,000. While this impacted fewer individuals in red states with lower tax rates, it affected a larger number of people in blue states with higher rates, including California, New York, and New Jersey. Now, Republican House members from these states are threatening to vote against a tax package approved by the House Ways and Means Committee, unless a provision is included to increase the SALT cap. Without their votes, the passage of these measures, which aim to reinstate expired tax cuts for businesses enacted under Trump and revoke climate-oriented tax credits introduced under President Biden, would be challenging.
Representative Anthony D’Esposito, who represents a district in Long Island, New York, which has some of the highest local property taxes in the country, emphasized the significance of including the SALT conversation in order to secure the support of New York representatives. Many households in D’Esposito’s Nassau County, as well as households in Falls Church, Virginia, New York City, and other New York and New Jersey suburbs, pay over $10,000 in annual property taxes. In contrast, the median household property tax bill in the majority of American counties is below $4,000. Representative Nick LaLota also underlines the importance of a higher SALT deduction as a means to prevent constituents from migrating to states like Florida and the Carolinas.
However, increasing the SALT cap would face resistance from other Republicans. Representative Kevin Hern, the chair of the conservative Republican Study Committee, believes that the “vast majority” of his 176-member caucus would oppose the elimination of the SALT cap. The SALT deduction has sparked numerous debates, with opponents viewing it as a targeted attack on blue states and a burden on middle-class homeowners with high local tax bills. The proponents of the cap argue that allowing unchecked deductions favors the wealthy and that it incentivizes blue states and cities to reduce taxes.
Nevertheless, skeptics argue that the SALT deduction has limited influence on local policy. Richard Auxier, an analyst at the nonpartisan Tax Policy Center, notes that the states affected by the SALT cap are predominantly controlled by Democrats and are unlikely to rush into cutting taxes for their highest earners. Many states have introduced laws to bypass the SALT cap, particularly for business owners. Almost every state with an income tax has amended its legislation to enable business owners to deduct an unlimited amount of state tax on their business income without it counting towards the federal SALT cap. However, North Dakota, Delaware, and the District have yet to propose or adopt such a workaround, according to the American Institute of Certified Public Accountants.
According to a 2018 analysis by the Tax Policy Center, the SALT cap significantly impacts the top 20 percent of earners. Removal of the cap is projected to save taxpayers in the top quintile an average of an extra $2,500 per year, and those in the top 1 percent approximately $30,000 per year. Representative Nicole Malliotakis acknowledges that this change would primarily benefit high-income households. As a member of the SALT Caucus and the Ways and Means Committee, Malliotakis suggests exploring alternative options, such as prohibiting individuals above a particular high income threshold from taking any SALT deduction, while offering a larger deduction for the middle class. Malliotakis also proposes using federal funds to exert direct pressure on states and cities to reduce taxes. She believes that relief should be provided at the federal level, rather than allowing state legislatures and city councils to perpetuate their excessive bureaucracies.
The current Republican tax bill is unlikely to pass, regardless of potential changes to the SALT cap. Instead, both the Republican-controlled House and the Democrat-led Senate will attempt to reach a compromise on a tax bill later this year. The final result may incorporate elements from both sides, such as extending business tax cuts favored by Republicans and increasing the size of the child tax credit, which enjoys bipartisan support.
Malliotakis is willing to vote for the current House bill in the hope of amending the SALT cap during negotiations with the Senate. She believes that a bipartisan caucus can work together to ensure that this issue is brought to the table, particularly since Senate Majority Leader Charles E. Schumer also represents New York. Malliotakis is confident that Schumer will be supportive in addressing this matter as their constituencies overlap.
Overall, the demand for a tax cut from the SALT Caucus is creating divisions within the Republican Party and obstructing the passage of the proposed tax package. The debate surrounding the SALT cap has become a contentious issue between Republicans and Democrats, with both sides putting forth arguments regarding its impact on different income groups and the incentives it provides to states and cities.\
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