As Congress weighs new tax cut package, SALT cap looms large as a key issue

ALBANY — Congress is negotiating a budget that includes a slew of potential tax cuts, but the big question for Long Islanders is whether federal lawmakers can alleviate the cap on state and local tax deductions, known as SALT.

The SALT deduction allows filers who itemize to subtract some of their state and local taxes from their taxable income. In 2017, the sweeping federal Tax Cuts and Jobs Act put in place a $10,000 cap on SALT deductions, which hit those with high incomes and high property values hard — particularly in high-tax states such as New York and especially on Long Island, which has some of the highest property taxes in the nation.

Republicans, who hold a majority in the U.S. House and Senate, are divided on whether to renew the cap as is, raise it or lift it entirely, an endeavor that could cost trillions of dollars, members of Congress told Newsday.

"There needs to be a fix in this bill or we won’t support it," said. Rep. Mike Lawler (R-Pearl River), who along with several other New York representatives is a member of the bipartisan "SALT Caucus," which aims to eliminate the cap. "We’re negotiating in good faith to get a number that is as high as we can get it as we work through all the provisions of the tax bill."

Democrats in both houses, particularly those from blue states that were hit the hardest, have been pushing to lift the cap entirely.

"We should get rid of any cap on SALT," Sen. Chuck Schumer (D-N.Y.), the Senate minority leader, told Newsday. "SALT was the dagger aimed at the heart of New York."

The controversial cap and other provisions of the tax overhaul are set to expire at the end of the year, including a child tax credit that helped provide tax relief for families and a doubling of the "standard dedication" that made it easier for taxpayers to file without having to itemize.

There's a cost whether it expires or is extended.

An expiration of the tax act, though unlikely, would raise tax revenue by between $4.5 trillion and $5 trillion over 10 years, said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, a nonpartisan think tank based in Washington, D.C. For households, that means taxes would increase by an average of about $1,900 in 2027, compared with what they’re paying this year, he said.

But there's also a multitrillion-dollar cost to renewing the tax act. And providing more cuts that would decrease tax revenues — including Republican-backed proposals to eliminate income taxes on Social Security benefits, eliminate taxes on overtime pay and slash taxes for the rich — would likely have to be offset by spending cuts or tax increases. The SALT cap was originally put in place to help pay for tax cuts in the 2017 law.

This creates a sort of balancing act between party interests and fiscal planning, tax experts said.

With the GOP holding narrow majorities in both houses, Republican votes will be crucial to getting the package through.

"Given the slim margins in Congress, each individual caucus member has a tremendous amount of political leverage," said Rachel Snyderman, managing director of economic policy at the Bipartisan Policy Center, a D.C.-based think tank.

Another factor is Trump, who has great influence over the Republican-led body. Trump in his campaign expressed a willingness to raise the cap. The White House did not respond to a request for comment.

Cap conversations

The Tax Cuts and Jobs Act, passed during the first Trump administration, took effect in the 2018 tax year. Overall the act was favorable to moderate- and lower-income taxpayers because of the higher standard deduction, according to a Newsday analysis and tax experts. But upper-middle class residents, particularly homeowners in high-cost areas such as Long Island who relied on the SALT deduction to reduce their federal taxes, were hit hard.

The SALT cap primarily affects taxpayers making more than $200,000 per year, Snyderman said, adding that taxpayers making less typically don’t pay enough SALT to be significantly affected by the cap.

If no action is taken, the SALT cap and other provisions of the act would expire by the end of the year, allowing residents to fully deduct their state and local tax deductions again, Gleckman said. But there’s "a lot of pressure on Congress to do something this year," he said.

Congress earlier this month passed what’s known as a reconciliation budget, an expedited process that sets targets for spending and revenues. Now they must negotiate detailed legislation.

One proposal would raise the cap to $25,000, according to media reports and members of Congress. Reps. Andrew Garbarino (R-Bayport) and Young Kim (R-Calif.), co-chairs of the SALT Caucus, in a statement earlier this month said the proposed increase "does not get close to bringing relief to families unfairly burdened by the current cap."

Other proposals include raising the cap to $30,000, which many SALT Caucus members also say is not enough, particularly as Republicans simultaneously propose tax cuts for the wealthy.

"They should fix the SALT issue and they should not give tax cuts to the wealthiest Americans and they should try and negotiate with people like me," said Rep. Tom Suozzi (D-Glen Cove), who co-chairs the caucus. He told Newsday that Democrats are not being consulted in the budget process, but applauded the Republican members who said they will not vote for a budget unless it includes a complete repeal or significant lifting of the cap. "That’s the only way it’s going to get done is by holding their votes," he said.

Weighing the cost

Some of the expiring portions of the tax law have bipartisan support and are likely to be renewed, including the standard deduction, the $2,000 per child tax credit and what’s known as the alternative minimum tax or AMT, which provided relief for those earning between $200,000 and $800,000, according to tax experts and members of Congress.

But one of the biggest challenges is cost, as the federal budget deficit continues to grow.

"We want a tax bill that creates economic growth and prosperity while obviously not blowing up the deficit and creating more debt," Lawler said.

Extending the 2017 tax act provisions would cost an estimated $4 trillion between fiscal 2025 and fiscal 2034, according to the Joint Committee on Taxation and Congressional Budget Office.

Raising the SALT cap even $20,000 would add another $225 billion to the cost over 10 years, Gleckman said, adding that the benefits are limited to a relatively small share of taxpayers because low- and moderate-income taxpayers no longer itemize because they take the standard deduction.

To offset potential growth, the Trump administration and Republicans in Congress have pushed for trillions of dollars in cuts, including to federal safety-net programs such as Social Security, Medicaid and Medicare. The cuts would be devastating for states such as New York, fiscal experts say.

The SALT deduction had been in place since 1913, said Kenneth Winkelman, an associate professor and chair of the Accounting, Taxation and Business Law Department at SUNY Old Westbury. If it hadn’t been capped, there wouldn’t be a discussion of how expensive it is to take the cap off, he said.

The budget process could take anywhere from a few weeks to several months, according to tax and policy experts. House Republicans have said they're aiming to get a deal done by Memorial Day.

"It’s very difficult to predict what Congress will do because there are so many moving parts and everyone has their own pet project and what they’re looking for," Winkelman said.