California taxpayers are hit hard by cap on state, local deductions. Will Biden repeal it?
Serious efforts are underway in Washington to lift a limit that former President Donald Trump’s 2017 tax law imposed on how much people can deduct in state and local income taxes on their federal return.
Some Democrats are warning they’ll oppose changes to the tax code — changes President Biden wants — unless the limits are repealed.
Congress’ two leaders are from high-tax states where removing the current limits on SALT deductions would be a big deal. “I’m a big supporter of their position” on repeal, House Speaker Nancy Pelosi, D-Calif., told reporters last week. Senate Majority Leader Chuck Schumer, D-New York, has also been supportive.
So have Democratic governors. in hard-hit states.
Friday, Gov. Gavin Newsom and six other governors sent a letter to Biden saying “on behalf of our residents, we urge your administration and Congress to continue these efforts to relieve this immense financial burden on our residents and eliminate the SALT cap entirely.”
The 2017 Republican-authored tax cut law imposed a $10,000 cap on state and local tax deductions.
“From a political standpoint, our goal was to make sure that the national taxpayers weren’t subsidizing the big spending in a lot of mostly liberal states,” Sen. Charles Grassley, R-Iowa, a top Republican on the tax-writing Senate Finance Committee, told The Sacramento Bee last year.
Big local impact
The change hits California, whose top income tax rates are the nation’s highest, particularly hard. The impact on local areas, according to the nonpartisan Tax Policy Center:
▪ 3rd congressional district, north and west of Sacramento, had the deduction on 33.5% of 2016 returns. Average deduction was $11,577.
▪ 4th district, east of Sacramento and into the Sierra foothills. In 2016, 45.3% of 2016 returns took the deduction, which averaged $14,286.
▪ 5th district, Napa County, much of Sonoma County, and some neighboring communities. 37.3% took an average deduction of $14,157 in 2016.
▪ 6th district, Sacramento, 28.1% of returns and took an average 2016 deduction of $10,019.
▪ 7th district, southern and eastern Sacramento County district, 39% of returns took the 2016 deduction and averaged $12,081.
▪ 10th district, northern San Joaquin Valley, 31.5% of returns took the 2016 deduction and averaged $10,845.
▪ 22nd district, parts of Fresno and Tulare Counties, 30.5% of returns took the 2016 deduction, averaging $11,726.
▪ 24th district, includes San Luis Obispo County, 35.1% took the 2016 deduction, averaging $16.462.
A break for the wealthy?
The bid to restore the full deduction is up against some powerful opposition — and is a dilemma for Democrats..
Opponents argue that repealing the deduction is a big tax break for the wealthy because they get most of the benefit, exactly what Democrats have been fighting against for years.
The nonpartisan Tax Policy Center found that the top 1% of households, those making $755,000 or more, would get more than 56% of the benefits of repeal.
“It simply transfers the tax burden to lower income people who don’t have large state and local taxes to pay, and it takes away from wealthy people who do,” said Sen. Pat Toomey, R-Pa.
Nonpartisan experts often agree.
“Getting rid of the SALT cap is really one of the more regressive tax cuts we could think about,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
The nonpartisan Tax Policy Center found that the top 1% of households, those making $755,000 or more, would get more than 56% of the benefits of repeal.
Why Democratic states want the cap lifted
Lawmakers in the states most affected, notably northeastern states and California, counter that it’s the middle class in the states that would benefit.
The current system is really double taxation, said Rep. John Larson, D-Conn., a senior member of the tax-writing House Ways & Means Committee.
The federal tax code recognized that people were already paying state and local taxes for state and local services. By ending the deduction above $10,000, “you’re being taxed again for that,” he said.
Biden has proposed increasing corporate taxes and is expected to seek higher income tax rates for the wealthy. Whether the repeal will wind up in legislation is still uncertain.
“It was mean-spirited to begin with, politically targeted...it was a mess all around,” said Pelosi of the 2017 action. “But hopefully, we can get it into the bill. I never give up hope for something like that.”
Key bill-writers won’t commit to any specific action.
Senate Finance Committee Chairman Ron Wyden, D-Oregon, says there are so many tax items to consider, “I think it will become a part of one of these efforts.”
The key to all this is the White House, and Press Secretary Jen Psaki is being circumspect.
“It would cost more money,” she told reporters. “(If) they want to propose a way to pay for it, and they want to put that forward, we’re happy to hear their ideas.”
This story was originally published April 6, 2021 at 5:00 AM with the headline "California taxpayers are hit hard by cap on state, local deductions. Will Biden repeal it?."
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