House Approves Bill to Lift Caps on State and Local Tax Deduction
This post was updated on Dec. 19, 2019.
In a largely party-line vote of 218 to 206, the House of Representatives today approved the Restoring Tax Fairness for States and Locality Act (H.R. 5377), which would temporarily lift the $10,000 maximum deduction cap on state and local taxes.
The Senate is not expected to take up this bill, and the White House has threatened to veto the bill. In its Statement of Administration Policy, the White House explained it opposes this bill because, in their view, “[t]his legislation would unfairly force all Federal taxpayers to subsidize a tax break for the wealthy, as well as excessive government spending by fiscally irresponsible states."
A last minute amendment prior to passage in the House would retain the $10,000 SALT deduction cap for taxpayers with income above $100 million.
As part of tax reform, the Tax Cuts and Jobs Act of 2017 (TCJA) lowered marginal tax rates, increased the standard deduction, largely eliminated the Alternative Minimum Tax (AMT), and made changes to itemized deductions, including lowering the mortgage interest deduction cap and limiting to $10,000 the maximum deduction taxpayers may claim for state and local taxes (SALT). The SALT deduction allows itemizing taxpayers to deduct from their taxable income property taxes paid as well as either state and local income or sales taxes. Prior to TCJA, taxpayers could generally claim an unlimited SALT deduction.*
The Restoring Tax Fairness for States and Localities Act would make the following changes:
- For 2019, the SALT limit would be doubled for couples to $20,000. Singles would continue to have a $10,000 cap.
- For 2020 and 2021, the SALT cap would be eliminated for all taxpayers.
- For 2022-2025, the SALT cap would return to $10,000. Under TCJA, the SALT cap (along with many other provisions) expires after 2025.
To offset the revenue loss, starting in 2020, the legislation would increase the top marginal tax rate to 39.6% from its current 37%. In addition, it would restore the lower pre-TCJA bracket thresholds for the 39.6% rate, making more income subject to the higher tax rate. Because the marginal tax rate increase and bracket threshold changes are made permanent under the bill, and the SALT relief is temporary, the Committee on Joint Taxation estimates this bill will raise $6.2 billion over ten years.
For states with high income and/or property taxes, the $10,000 limit on SALT deductions has been politically challenging. Republicans have generally defended the TCJA's limitations while the SALT cap has been a political target of Democrats.
*Taxpayers subject to the AMT are unable to claim the SALT deduction. In addition, the Pease limitation, which was repealed in TCJA, reduced the total value of deductions some taxpayers could claim.