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Financial Planning > Tax Planning > Tax Deductions

SALT Cap Suspension for 5 Years Emerges as Leading Option

By Laura Davison and Billy House

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What You Need to Know

  • A group in the House has vowed to block Biden’s economic agenda until the $10,000 deduction limit is addressed, but Senator Bernie Sanders says such a plan is "unacceptable."
  • The cap would then be reinstated from 2026 to 2030, according to one source.
  • The SALT deduction is a valuable tax break for many residents of high-tax states, including New York and California.

House Democrats are considering a five-year suspension of the cap on the federal state and local tax deduction before it’s reinstated in 2026, according to people familiar with the negotiations, a plan that Senator Bernie Sanders quickly declared “unacceptable.”

That temporary suspension has become the leading option in discussions about the SALT deduction limit. But the pushback from progressives like Sanders on extending the tax benefit to the ultra-wealthy likely will force proponents to reassess. His opposition is enough to block the bill in the Senate.

“I am open to a compromise approach which protects the middle class in high tax states,” Sanders, a Vermont independent who caucuses with Democrats, said in a statement. “I will not support more tax breaks for billionaires.”

Representative Pramila Jayapal of Washington, chair of the Congressional Progressive Caucus, said other members of the group also are “not happy” with the SALT proposal.

The SALT cap is one of several items still under negotiation for legislation to enact President Joe Biden’s economic agenda that have been holding up drafting of text and a House vote. Lawmakers from the Northeast and other high-tax areas have been lobbying to suspend or significantly raise the cap and have threatened to withhold support for the overall package if it’s not included.

The cap would be suspended for all taxpayers from 2021 to 2025 under the latest proposal, according to a Ways and Means Committee aide. The $10,000 cap would then be reinstated from 2026 to 2030, the person said.

Because the cap is currently scheduled to end in 2025, moving the restriction to a different five-year block within the 10-year budget window would let Democrats claim that the move doesn’t add to the deficit. However, Democrats say they hope to repeal the cap completely by then, though there is no guarantee they’ll have the majorities in Congress to do so.

“The cap on the SALT deduction remains a punishing blow to our home states of New York and New Jersey as we work to recover from the pandemic and get our economies on strong footing and our constituents back to work,” Representatives Tom Suozzi of New York and Josh Gottheimer and Mikie Sherrill of New Jersey, all Democrats who advocated for expanding the write-off, said in joint statement. “We will continue to work with House and Senate leadership to ensure the cap on the SALT deduction is repealed.”

Unless the cap is reinstated in five years, as the plan envisions, a repeal would cost roughly $475 billion, with $400 billion of the tax cut going to the top 5% of households, according to the Committee for a Responsible Federal Budget think tank, figures also cited by Sanders on Tuesday.

The talks over a five-year suspension of the cap were reported earlier by Punchbowl News.

Sanders told reporters that he could support a change to SALT that would lift the SALT cap only for those with incomes under $400,000 a year. Senator Bob Menendez, a New Jersey Democrat, has floated a similar concept, but allowing those with up to $1 million in earnings to have unlimited SALT deductions.

Ways and Means Chairman Richard Neal said the idea of a five-year SALT-cap is “part of the discussion” but talks are continuing.

House Speaker Nancy Pelosi said she hopes to have the text of the final bill, including the SALT compromise, Tuesday evening. Representative Bill Pascrell, a New Jersey Democrat, said there will be an “uproar” from members if raising the SALT deduction limit isn’t in the bill that goes to the floor and that House leaders have committed to including it in the tax and spending plan.

Tax Vow

The SALT deduction is a valuable tax break for many residents of high-tax states, including New York and California. Nearly two dozen representatives have vowed to block Biden’s economic agenda until they can find a way to address the $10,000 SALT cap, which was imposed in President Donald Trump’s 2017 tax law.

Plans to completely lift the cap have long faced resistance from some progressives, including Representative Alexandria Ocasio-Cortez of New York, who says that would do too much to benefit billionaires. She has said she supports raising the cap to benefit middle-income taxpayers.

Jayapal said full repeal for five years, with one year retroactive, is, for some members of the caucus, “too much. “I think there was some tolerance to do something,” but “full repeal, retroactively is probably going to be challenging,” she said.

Democrats have been for weeks looking at several options for SALT relief that rely on using budget gimmicks so the plans don’t add to the deficit outside the 10-year federal budgeting window. Another option lawmakers had considered is suspending the cap for 2022 and 2023 and then re-imposing the $10,000 limit for 2024 through 2027.

Another proposal that had been floated is a $75,000 limit that would last for a decade, though that plan is dead on arrival, according to one Democratic member of Congress, who asked to remain anonymous because the talks are ongoing.

The SALT deduction is one of the last tax issues for Democrats to resolve, after months of negotiations about how to structure the tax portion of the package.

 

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