New bill would fully restore SALT deduction for some taxpayers

New legislation aims to resolve the contentious issue of the state and local tax deduction, a sticking point in tax bill negotiations and an important issue for states and localities.

Reps. Tom Malinowski, D-N.J. and Katie Porter, D-Calif., introduced a bill last week that would fully restore the state and local tax deduction for Americans making less than $400,000 a year, while increasing the deduction cap for those making between $400,000 and $1 million.

The Supporting Americans with Lower Taxes (SALT) Act, which would use the revenue raised over 10 years to pay for new vision and hearing benefits under Medicare, could be a compromise on the contentious SALT cap issue.

“When I first ran for congress, I promised to right the wrongs of the 2017 GOP tax bill by restoring the SALT deduction for my middle-class constituents,” Malinowski said in a statement about the bill, adding, “The proposal Representative Porter and I are putting forward would keep that promise, while remaining fiscally responsible and delivering a new Medicare benefit that our seniors have long been waiting for.”

Ushered in as part of Donald Trump’s 2017 Tax Cuts and Jobs Act, the SALT cap limits to $10,000 the amount of state and local taxes taxpayers can deduct from their federal obligations.

Since then, Congress has debated whether to fully restore the SALT deduction, which Porter and Malinowski pointed out was designed to prevent Americans from being taxed again at the federal level on income already taxed and taken by their state and has been in the tax code for more than 100 years. Another question is whether to merely limit the SALT deduction cap, which is set to expire in 2025.

Some lawmakers, including vocal SALT cap opponent Rep. Tom Suozzi, D-N.Y., have long-argued that because the cap discriminates against taxpayers in states with a high cost of living, it should be fully repealed.

Suozzi, who announced in November that he is leaving the House of Representatives, helped to coin the “No SALT, no deal” refrain during negotiations last year over the Biden Administration’s Build Back Better legislation.

Most recently, a multistate coalition that includes New York, Connecticut, Maryland and New Jersey petitioned the U.S. Supreme Court to review a 2nd Circuit Court of Appeals ruling that the cap on state and local tax deductions does not violate the Constitution.

Those states advanced an argument similar to the one made by Porter and Malinowski–that the SALT cap improperly discriminates against taxpayers based solely on where they live.

State and local advocacy groups have also said that the SALT cap potentially limits their own abilities to raise revenue locally.

Porter added that "middle class families in Orange County, CA, have been feeling the [economic] squeeze,” and that “Trump tax law's cap on the state and local tax deduction has made it worse."

"Our tax code should provide a level playing field across states,” Porter said.

To address this, the bill would eliminate the SALT deduction cap for single or joint filers that make under $400k. For filers making $400,000 and above, the SALT deduction cap would start at $60,000.

That $60k SALT cap would be reduced at a rate of $10,000 for each $100,000 of income in excess of $400k, according to the release. The bill would also require all tax filers claiming SALT deductions to attest that their total assets do not exceed $1 billion.

Porter described those provisions as “sensible guardrails to prevent abuse by the ultra-wealthy."

Revenue raised by the bill would go to a new Medicare vision and hearing trust fund.

According to the release, estimates from the Tax Foundation are the bill would raise $150.9 billion over ten years over the status quo. Malinowski and Porter say that amount “would fully cover the cost of creating a Medicare hearing and vision benefit.”

“This is a win-win approach that we hope will produce compromise on the SALT issue,” Malinowski said.