Blue-state Democrats have been fighting since 2017 to repeal a key provision of President Trump’s tax plan that penalized high-cost California filers.
The so-called SALT tax cap imposed a $10,000 limit on IRS deductions for state and local taxes like income and capital gains levies and property taxes.
The measure primarily affected residents of high-cost, Democratic-leaning states like California, New York and New Jersey, which have some of the highest taxes and highest property values in the nation.
Now, Southern California Rep. Katie Porter is trying to roll back that provision, co-sponsoring the latest attempt to revive the state tax deduction. Her bill eliminates the cap for taxpayers earning less than $400,000 a year while phasing it out for those making more than that.
“All deductions, including the one for state and local taxes, are based on the fact that people should not be taxed on money that they don’t have to spend,” Porter said in a phone interview.
“This is sort of a common-sense policy that we’ve had in our tax code since 1913,” she said. “ … They have to make allowances in the tax system for certain things to let people make ends meet.”
The “Supporting Americans with Lower Taxes Act” – co-sponsored by Porter, D-Irvine, and U.S. Rep. Tom Malinowski, D-New Jersey – is one of at least five SALT bills either introduced or under review in Congress’ current session.
The House-passed Build Back Better economic package includes a provision to raise the cap to $80,000 through 2030.
A compromise plan backed by Sen. Bernie Sanders, like the Porter-Malinowski bill, would eliminate the cap for taxpayers earning less than $400,000, while imposing some form of a cap for those earning more.
Some Republicans also support repeal. U.S. Rep. Mike Garcia, R-Santa Clarita, introduced a bill last year that would eliminate the cap altogether.
Until the Tax Cuts and Jobs Act of 2017, Americans who itemized their deductions were able to decrease their taxable income by deducting state income and property tax payments. The only limit was on wealthy filers affected by parallel systems like the alternative minimum tax.
Supporters of the tax cap saw the SALT deductions as a federal subsidy for high-tax states, at the expense of states like Texas and Florida that don’t levy income taxes. A recent Heritage Foundation report argued the deduction is unwarranted because residents benefit from the state and local government services their taxes fund.
“Taxpayers cannot claim a deduction for private consumption, nor should they be able to deduct the cost of the services that they — or their elected representatives — choose,” the report said.
California’s Franchise Tax Board estimated in 2018 that 957,000 California households paid an extra $12 billion in federal income taxes in the first year, averaging about $12,539 more per family.
The Washington-based Institute on Taxation and Economic Policy recently estimated the SALT cap will cost U.S. taxpayers nearly $101 billion more this year, with $33.5 billion of that coming from California taxpayers.
But most of that extra revenue is paid by wealthy taxpayers, the tax institute and the D.C.-based Tax Foundation reported. If the cap were repealed, the tax institute estimated, 85% of the cuts would go to the nation’s richest 5%, or those earning more than $276,200 per year.
Some progressive Democrats who oppose the repeal call it a tax cut for the rich.
But you don’t have to be wealthy to be affected by the tax cap. A California couple earning $148,000 and owning a median-priced house would have a state income and property tax bill of about $13,100 this year, or $3,100 more than the $10,000 cap.
The state’s 2018 analysis showed 752,000 Californians earning less than $250,000 a year paid an additional $1 billion in federal taxes thanks to the SALT cap. A fifth of those, or 132,000 Californians, had incomes below $100,000 a year.
The Porter/Malinowski plan takes a middle path, restoring the deduction for lesser affluent filers, but keeping it in place for the rich.
The bill would raise the cap to $60,000 for filers making $400,000 to $500,000, then reduce it by $10,000 for each $100,000 of income. The deduction would be zero for filers making $1 million or more.
The SALT cap also has a marriage penalty, Porter argued, since the deductions are limited to $10,000 for both individuals and for couples filing joint returns.
Porter wouldn’t comment on the bill’s chances for passing. The House proposal, contained in the Build Back Better Act, remains tied up in the Senate.
But Porter said she’s determined to fight for repeal, crediting the issue for getting her elected to Congress.
Taxpayers hurt by the SALT cap are disproportionately from states that did not support Trump, and Trump “made no bones about this being designed and intended to punish people in blue states,” Porter added.
“I don’t think that our tax system should ever be used for partisan attacks against members of either party,” she said.
Source: www.mercurynews.com