Washington – U.S. House Democrats on Tuesday pushed for a repeal of a provision of the GOP tax law that capped the deductibility of state and local taxes, known as SALT, on federal returns.
Democratic members of the House Ways and Means Committee heard from local officials across the nation who said the new $10,000 cap on the deductibility of state and local taxes is hurting their residents and pressuring their jurisdictions to ratchet back on spending on police, schools, firefighters and other services because they don’t want to add to their residents’ tax burdens.
Bob De Natale, the mayor of Bayville, a coastal Long Island town, testified that the SALT deduction has led to an increase in the number of homes for sale in his community, where the median property tax is $20,000.
“We have over 60 homes listed for sale, a 30 percent increase over 2017,” De Natale said.
Bayville’s mayor said those leaving his town are “further eroding our tax base.”
“Limiting the SALT deduction will have a long-term effect on the financial health of my community,” De Natale said.
There have been other anecdotal evidence of the impact of the change in federal tax policy.
Some real estate agents say it has prompted young home buyers to ask to see only homes whose property taxes would allow them to stay under the cap. And they say affluent homeowners – in Connecticut, New York, California and other high-cost of living states, are getting estimates for how much they would save by moving to a low-tax state.
Some taxpayers saw a higher federal tax bill this year because they could not fully deduct their state and local taxes.
The Connecticut Department of Revenue Services says the SALT deduction will impact more than 171,000 Connecticut filers, resulting in more than $10.3 billion in lost deductions.
Other taxpayers, however, may benefit more by the tax bill’s sharp increase in the standard deduction, to $12,000 for single filers, $24,000 for married couples and $18,000 for heads of household.
The full impact of the cap on the SALT deduction cannot be determined because, although the limitation went into effect last year, many taxpayers received extensions on their 2018 returns and the Internal Revenue Service won’t have accurate state-level information for at least another year.
That hasn’t stopped the hyper-partisan debate in Congress over the SALT cap from escalating, with Democrats, whose “blue state” constituents are more likely to have higher salaries and higher taxes than those of their “red state” GOP counterparts, saying it hurts middle income families and working people.
Rep. John Larson, D-1st District, called it “god awful.”
“In my state, 750,000 people avail themselves of the deduction and the average deduction is $19,000,” Larson said. “So, the $10,000 cap is of little help.”
Larson asked the Ways and Means Committee to include letters about the adverse impact of the SALT tax from Connecticut taxpayers to be included in the hearing’s records.
Republicans, meanwhile, say the cap mainly affects millionaires, who have received other benefits under the GOP tax law, including a change in the alternative minimum tax and a lower tax bracket.
“Repealing the SALT cap would cost $673 billion over the next 8 years, and a majority of the benefit would go to the highest earners – it would amount to a $67,000 per year tax cut for families earning more than $1 million,” said Rep. Adrian Smith, R-Neb. “To contrast, the average middle-class family making $50,000 to $75,000 would receive less than $5 per year.”
Supporters of the cap on SALT deductions, including members of the Trump administration, also argue that poorer parts of the country shouldn’t have to subsidize regions that are wealthier.
Rep. Tom Rice, R-S.C., asked De Natale: “How do I explain … to somebody whose income is one-fourth of what it is in your district — one-fourth — how do I explain to them that they should subsidize part of the cost of living in Long Island?”
The GOP argument received a boost on Monday with the release of a report by the Joint Committee on Taxation that said more than half the benefit of removing the SALT cap would go to those making more than $1 million.
The Ways and Means Committee also held a second hearing Tuesday to allow Democrats to discuss their proposals related to the SALT deduction cap.
But the SALT cap appears likely to remain law, at least for now. Senate Finance Committee Chairman Charles Grassley, R-Iowa, said he will not consider any changes to the GOP tax law.
Connecticut, New York and other states have tried to establish a work-around the SALT cap by allowing local governments to establish charitable organizations that would allow taxpayer contributions to be applied as credits to their tax bills. The new tax law does not cap the deductibility of charitable contributions.
But no town in Connecticut established that type of fund, and the IRS has recently issued new regulations that would undercut those efforts.
Under the new regulations, taxpayers would be able to receive a federal deduction only for a charitable contribution amount that is greater than the amount of the tax credits they received. For example, if a taxpayer donated $1,000 to the fund and received a 70 percent credit against his or her local taxes, the taxpayer could claim a federal charitable tax deduction of only $300.