GOP eyes compromise 'SALT' cap in low-to-mid 5 figures

Blue-state Republicans left a meeting with President-elect Donald Trump confident in his support of raising the $10,000 cap on state and local tax deductions, increasing the likelihood Congress will raise the limit in tax legislation this year.

Trump’s backing for raising the so-called SALT cap will be key to smoothing over possible objections from others in the Republican conference representing lower-tax states, who are content to leave the limit in place. The cap was imposed by the 2017 tax legislation Trump signed into law to bring down the cost of the $1.5 trillion measure, but the president-elect has since changed his tune on the provision.

House members from New York, New Jersey and California left Saturday’s meeting with Trump at his Mar-a-Lago resort in Palm Beach, Fla., with instructions to reach an agreement on a higher cap that’s targeted to provide relief for middle-income taxpayers.

Negotiators also have to be mindful of the fiscal parameters laid out for the upcoming budget reconciliation process, which would allow Republicans to write filibuster-proof legislation but only if it doesn’t exceed certain deficit limits.

“He gave us the homework to identify a number that could work and cover the vast majority of the middle-class families that we represent,” Rep. Nicole Malliotakis, R-N.Y., said in an interview following the meeting. “What is the number that would provide relief for our middle-class families that can get consensus so we can reach the 218 [votes threshold] and that works within this Rubik’s cube of reconciliation within the topline number that we’re provided by the Budget Committee? That’s the real question.”

‘More than doubled’

House Republicans seeking SALT relief hold differing views on where to set the cap, but a limit between roughly $20,000 and $60,000 seems to be the range under consideration.

“Any increase, whether it’s going to be doubling it, or tripling it, or quadrupling it, is a win. But, you know, we’d like to see it a little more than doubled,” Malliotakis said. The New Yorker is the most vocal advocate for SALT relief among Republicans on the tax-writing Ways and Means Committee.

Fellow New York Republican Rep. Mike Lawler, who attended the meeting, pushed for a $60,000 SALT cap on Fox’s “Sunday Morning Futures.” Lawler represents a district that includes Westchester and Rockland counties, whose constituents tend to have higher incomes and tax bills than voters in Malliotakis’ district, which includes Staten Island and parts of Brooklyn.

“We’re going to negotiate in good faith with our colleagues and with the president to come up with a number on SALT that works,” Lawler said. “The fact is that, you know, if you lift it to, say, $60,000 for an individual, it covers most everybody. So we’re working through this.”

A $60,000 cap is lower than the $100,000 cap for individuals and $200,000 for married couples Lawler included in a bill introduced this month, but would still likely benefit wealthier households who pay higher-than-average state and local taxes.

The average SALT deduction claimed by taxpayers earning between $200,000 and $500,000 in 2017, the last year without the cap, was $23,000, according to IRS data. In New York, the average deduction claimed for that income range was closer to $34,000.

The same year, households with $500,000 to $1 million in annual income deducted an average of $56,000 in state and local taxes from their federal tax bill, according to the agency. That’s in line with Lawler’s scaled-back proposal, which he views as a reasonable compromise but may run afoul of marching orders to keep a higher cap targeted to middle-income households, as opposed to wealthier ones.

Hunt for offsets

There are additional modifications lawmakers could impose to limit the cost of raising the SALT cap and dissuade state and local officials from using it to raise taxes further, Malliotakis said.

In the meeting, she pitched increasing the SALT cap for households below a certain income level; allowing it to apply to property taxes paid on a primary residence, but not a second or third home; and rewarding states and localities that freeze or cut taxes with an additional SALT cap increase.

Last year, blue-state Republicans fought to double the $10,000 cap for married couples, saying it would put an end to a so-called marriage penalty written into the law, which applies the same limit on deductions to individuals and married couples. But Republicans are weighing leaving the penalty in place if it means setting a higher SALT cap across the board, Malliotakis said.

After Republicans agree on where to set the SALT cap, they’re likely going to have to also figure out how to pay for it.

Malliotakis floated closing “loopholes” that allow profitable corporations to pay tax rates in the single digits as a possible revenue-raising measure, as well as making fewer tax credits available to people who make too little to be subject to income tax.

Ways and Means Rep. Brian Fitzpatrick, R-Pa., who last week convened a meeting between his “Working Families tax team” and blue-state Republicans, also cited limiting corporate state and local tax deductions as a potential offset. He also pointed to potential changes to the current alternative minimum tax, which was dramatically scaled back in the 2017 tax law and is set to snap back into its old form without action from Congress.

“We need to come up with a menu of items of what has what budgetary impact. There’s a number of ways you can do that,” Fitzpatrick said in an interview last week. “There’s individual SALT. There’s corporate SALT. The AMT [alternative minimum tax] changes were made in many ways in conjunction with SALT in the 2017 bill. So there’s a lot of flexibility we have.”

Removing the SALT deduction for corporate income taxes — which the 2017 law left in place — would raise $192 billion over 10 years, according to the Bipartisan Policy Center. That would drop to $134 billion when the corresponding economic effects are taken into account.

Malliotakis said she opposes the return of the alternative minimum tax, which capped SALT deductions for many households before the AMT was scaled back in the 2017 law, in any form. New Yorkers are wary of an offset for raising the SALT cap that would also target taxpayers in their state, she said.

They also impressed on Trump that they didn’t want to see their state disproportionately hit by deep spending cuts the GOP has planned for this year, in addition to bearing the brunt of the SALT cap, she said.

A menu of more than $5 trillion in potential spending cuts drawn up by House Budget Republicans that became public last week drew heavily on Medicaid, the joint federal-state health care benefit for the poor, food stamps and other social welfare programs. Those cuts are likely to hit populous states hardest.

“We don’t want New York to be taking the brunt of spending cuts either,” Malliotakis said. “We should not be in a situation where New York is getting an unfair burden … when it comes to spending cuts and then we’ve got to fight for SALT relief. It’s got to be more proportional. The haircut has to be across the board.”

David Lerman contributed to this report.