WaPo (“House considers expanding state tax deduction for some families“):
The House is preparing legislation to cut federal taxes for relatively high-income married couples in high-tax states, a measure meant to placate politically vulnerable Republicans who last week nearly held up another tax relief measure for working families to force a vote on the issue.
The legislation, sponsored by Rep. Michael Lawler (R-N.Y.), would raise the cap for the state and local tax deduction, known as SALT, for married couples who file taxes jointly and make up to $500,000.
Congress had capped the deduction both for individuals and couples at $10,000 to help pay for President Donald Trump’s 2017 tax cuts. Lawler’s bill, which has support from a phalanx of other Republicans from Democratic-controlled states, would let married couples offset up to $20,000 of income on their federal returns with state and local taxes for the current tax year. The cap would drop back to $10,000 in 2024 until it expires in 2026.
The bill, though, is entangled in larger disputes over which factions of the raucous GOP conference control the House, how Republicans will attempt to hang on to the chamber in November’s elections and the early skirmishes in the debates that will ensue when the Trump tax cuts expire in 2025.
The House last week passed another tax bill to expand the child tax credit, mostly claimed by working parents, and restore certain corporate tax breaks. The measure, which still must pass the Senate, could lift 400,000 children out of poverty, according to nonpartisan estimates.
The balance in that bill satisfied members of both parties — mostly Democrats for the tax credit expansion and mostly Republicans for the business provisions, though each part of the deal had support in both parties — and helped lawmakers build up their tax policy priorities ahead of a larger legislative push expected at the end of the year.
But residents of high-tax states who used to be able to deduct their entire state and local tax bills — property and income taxes alike — have been pushing to change the SALT cap since the 2017 tax bill.
Even at the $10,000 cap, the deduction is still mostly taken by wealthier tax filers, who earn enough to owe larger state and local tax bills and have enough other deductions to make it worth itemizing rather than taking the standard deduction, which is worth $27,700 for married couples filing jointly this tax season.
The nonpartisan Tax Foundation found that the vast majority of the benefits of doubling the cap would go to couples who earn more than $200,000, and between a third and half of them would see a tax cut. A different nonpartisan estimate by the Penn Wharton Budget Model at the University of Pennsylvania found that the legislation would cost $12 billion in lost federal tax revenue.
But Lawler and other New York and California Republicans represent districts that President Biden carried in 2020, and theymay face longer odds to reelection after liberal state legislatures redraw congressional districting maps. Bringing home a SALT expansion, the lawmakers say, could be key to the economic planks of their campaigns.
As noted before, this change in the tax code hit us pretty hard. We went from pretty routinely getting a refund on our taxes to owing taxes until getting our deductions sorted out. Our state and local tax bill is somewhere in the neighborhood of $30,000 a year, as Virginia has rather high property taxes, including maddeningly high annual taxes on vehicles one already owns.
From a public policy standpoint, I can preach it either way. On the one hand, there was fairness to the old policy of unlimited deductibility: people shouldn’t pay income taxes on money that was already confiscated by another government. On the other, the burden falls on relatively high earners and removing the deductibility increases tax revenues that would otherwise have to be made up elsewhere. (In between, there’s certainly an argument to be made for phase-outs rather than immediate changes to this sort of tax policy, since people make long-term financial decisions like home purchases based on longstanding policy environments.)
But, of course, this is about politics, not policy. The deduction was capped under Republican control of the government almost entirely with the aim of screwing over Democrats. It’s people who live in major urban centers and “blue” states who tend to have the highest state and local tax burden. And the momentum for repeal is coming from folks who represent those people.
