Senate Plan Threatens State and Local Tax Deduction

Senators discuss the budget.
Senators discuss the budget.

Thursday evening, the Senate passed the FY2018 Budget reconciliation spending blueprint, paving the way for a potential $1.5 trillion tax cut. In a misguided effort to provide a pay for an ambition tax reform plan yet to be seen, Senator Shelley Moore Capito (W.Va.) proposed an amendment that opens the door to a cap or elimination of deductibility of the state and local tax deduction (SALT).

Capito’s amendment passed along a mostly party line vote, with Democratic Senator Joe Manchin (W.Va.) joining his colleague in voting yes. The amendment states that it intends, “to help provide tax relief to middle-class Americans by reducing deductibility, federal deductions such as the state and local tax deduction disproportionally favors high-income individuals.”

But, while the amendment claims good intentions, it actually makes it easier for a critical middle class tax deduction to be axed during budget reconciliation.

Why SALT Matters?

Numbers show that the SALT deduction greatly benefits middle class filers in every region of the country. More than half of the total amount of SALT deductions went to taxpayers with adjusted gross incomes (AGI) under $200,000. For city governments, the SALT deduction prevents double taxation by allowing millions of middle class families in cities to deduct their local property, sales and income taxes, which allows local governments to raise the revenues needed to make critical investments in infrastructure, public safety and education.

Any alteration to this 100-year intergovernmental relationship would place pressure on cities to lower their local taxes to offset increased effective federal tax rates. Essentially, forcing cities and families to pay for corporate tax cuts.

In a GFOA report based on 2015 IRS data, the conclusions were firm that SALT benefits middle class families.  If SALT were repealed, the report concludes, almost 30% of taxpayers, including individuals in every state and all income brackets, would be adversely impacted. While we agree that a comprehensive tax reform is needed and that any reform should work to create a more equitable and fair code, benefiting the middle class—removing this longstanding deduction would have the opposite effect.

So, What Does the Capito Amendment Actually Do?

The amendment is not a death sentence for SALT, but it does lower the threshold typically required to reduce or eliminate it. NLC backed an amendment proposed by Senators Cantwell (Wash.) and Van Hollen (Md.), which did not pass, but would have subjected any tax proposal in budget reconciliation to a 60-vote majority in order to pass. Capito’s amendment did the opposite, by establishing that a bill that proposed a reduction or elimination of SALT would only need a simple 50-vote majority.

Where Does SALT Stand Now?

It is entirely possible that the amendment will not survive the conference process, where differences between the Senate and House versions will be ironed out. Either way, this week’s announcement is far from indicating that SALT is dead, but it certainly highlights that we have our work cut out for us when it comes to protecting city priorities in tax reform.

To learn more about NLC’s efforts on SALT and how you can join the fight to preserve city priorities in tax reform, visit www.nlc.org/SALT.

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