U.S. House vote to lift federal tax deduction cap could be short-lived

WASHINGTON – A vote in the House to lift a cap on federal tax deductions for state and local tax payments (SALT) was glad tidings for high income, high tax states like Minnesota.

The great joy may be short-lived, however, as the bill faces long odds of even being considered in the Republican-controlled Senate.

The so-called SALT cap, imposed by the 2017 national tax reform, restricts taxpayers to $10,000 in state and local tax write-offs on their federal returns. It has become a national point of contention, not merely between Republicans and Democrats, but also between states that pay more in federal taxes than they receive in federal funding and states that get back more than they put into the U.S. Treasury.

Three Republicans from New York, one from Pennsylvania and one from New Jersey joined Democrats to pass the two-year elimination of the SALT cap.

The cap impacts affluent areas of Minnesota like the Twin Cities. But it has an effect across the state.

Annually, almost 1 million Minnesota households claim SALT deductions, said Democratic Rep. Dean Phillips, who helped push the bill that lifts the cap for two years. The average payment is "just under $14,000."

"I am advocating for Minnesota," Phillips explained shortly before the House voted 218-206 to approve the Restoring Tax Fairness for States and Localities Act last week. "And I'm hoping our entire delegation will do the same."

Minnesota's GOP Reps. Tom Emmer, Pete Stauber and Jim Hagedorn voted against the bill, which replaced the SALT deduction cap with reinstatement of the top individual income tax bracket of 39.6% for households with more than $427,000 in income.

Emmer, Stauber and Hagedorn did not respond to requests to explain their votes.

Republican architects of tax reform used the SALT cap to help pay for an overall tax reform package that significantly cut corporate tax rates, made modest reductions in individual income tax brackets and doubled the standard deduction to simplify the tax system. Tax reform is expected to cut the number of Americans who itemize by more than half, said Frank Sammartino, a senior fellow at the Urban-Brookings Tax Policy Center.

Still, the SALT cap remains a big sticking point for those who continue to itemize and for many local officials who fear the cap will hamstring their efforts to fund schools, roads and other services that the federal government does not completely pay for.

Republicans in Congress say the SALT deduction benefits high-income taxpayers the most and that the $10,000 allowable deduction is less than the national average of SALT payments.

Kath Hammerseng, a Realtor with Edina Realty, said the SALT cap could cause families to delay moving to higher priced houses because they cannot write off tax payments. She also believes some Minnesotans will not be able to afford to keep lake cottages from one generation to the next.

Burnsville's Republican Mayor Elizabeth Kautz has called the cap a form of double taxation because you pay state and localities their taxes, but the amount above $10,000 also becomes part of your federal income on which you must pay federal taxes.

Taxpayers using the standard deduction far outnumber those who itemize and use the SALT deduction, Sammartino said. At the same time, wealthy individuals who pay the most in state and local taxes subsidize shared local services such as health, education and welfare benefits available to those with low incomes.

For Phillips, whose Third Congressional District constituents averaged almost $20,000 in SALT payments in 2017, being able to write off all local and state taxes on federal returns is more critical than paying additional federal taxes.

The SALT cap is "punishment to states that invest in roads and people," Phillips told colleagues as the House debated the bill.

There is also a political component, Phillips added, because states such as Minnesota with high incomes and high local and state taxes tend to vote Democratic, and states with lower incomes and low local and state tax rates tend to vote Republican.

Finally, there is the question of how best pay for tax reform. While many tax specialists agree that the SALT deduction is regressive, they also say that reinstating the 39.6% income tax bracket is a more progressive way to pay for the plan.