Return of SALT deduction spicing up debate on Capitol Hill

A cherished tax deduction that hit high-income earners in New York, California and New Jersey and was eliminated by the Trump Administration may soon be making a comeback. 

Momentum is building for the reinstatement of the federal government's state and local tax deduction better known as the SALT deduction FOX Business has learned. The deduction was nearly eliminated as part of the former President Trump's Tax Cuts and Jobs Act of 2017. Instead, the federal government instituted a $10,000 cap on the SALT deduction. Previously there was no cap. 

Significant lobbying by the Partnership for New York City, a non-profit advocacy group that represents local businesses in New York, as well as pressure from congressional leaders who represent districts being decimated by the burden of additional tax dollars, has resulted in the deduction being discussed as part of President Biden's new $4 trillion spending plans, according to people with knowledge of the matter. 

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The Biden administration's spending proposals contain significant tax increases on already over-taxed residents in states such as New York, California and New Jersey. Without the reinstatement of SALT, the tax base of these states could be further eroded as residents flee to lower-costing locales in Florida and Texas. The Partnership for New York City has held meetings with Senate Majority Leader Chuck Schumer, D-N.Y., who is said now to be in favor of reinstating the deduction as part of the Biden spending proposals. 

Another key person in the talks to reinstate SALT has been Rep. Mondaire Jones, D-N.Y., who represents parts of Westchester County. Though a progressive who is generally in favor of taxing the rich, Jones's district is one of the most heavily taxed areas of the country given its upper-income demographic.   

Jones, is one of the original co-sponsors of the SALT Deductibility Act. He also introduced the bill which would remove the cap on deductions put in place by the Tax Cuts and Jobs Act of 2017.  

"I’m pleased that people are starting to recognize that the SALT restoration is important to the country’s most important economic and employment centers," says Kathy Wylde, CEO of the Partnership for New York City. 

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Sources tell FOX Business that Democrats are confident they can get at least a compromise on the SALT deduction despite opposition from progressives who believe reinstating the SALT cap would essentially be a massive tax cut for the rich. The compromise would involve raising the cap from $10,000 to at least $30,000 so that taxpayers can afford a little more wiggle room to deduct higher amounts of local tax payments on their federal tax returns. 

One of the leaders of the progressive wing of the party, New York's Rep. Alexandria-Ocasio Cortez, has previously voted against the repeal, saying it would only benefit the wealthy.  Her progressive counterpart in the upper chamber of Congress, Sen. Bernie Sanders, I-VT., told "Axios on HBO" on Monday he opposes the efforts by Democratic leaders to bring back SALT because it only benefits the wealthier residents of blue states. Sanders went on to say it’s a bad move for a party that is supposed to represent the working class.   

But it is not just progressives who are opposing the SALT tax deduction.

Conservative business leaders such as JPMorgan CEO Jaimie Dimon have spoken out against reinstating SALT because he believes it allows the state of New York to engage in fiscally irresponsible policies. Critics say New York State has been able to spend and tax heavily while running budget shortfalls because its more wealthy residents remain in the state because they can write off their state and local taxes as part of their federal filings every year.     

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However, FOX Business has learned that as many as eight House Democrats -- who represent districts with high state and local taxes – have vowed not to vote for Biden’s infrastructure and spending packages without the reinstatement of the SALT deduction. With such a slim majority of Democratic control in the House, losing any votes at all could throw a serious wrench in Biden’s big spending plans.    

Evidence also suggests the middle-class taxpayers are being hit just as hard by the SALT cap. For example, according to the Partnership for New York City, taxpayers in Florida and Texas with adjusted gross income below $100,000 who itemized in 2018, lost average deductions of $550 and $960, respectively, mostly in property tax deductions. In New York, the loss for this income group averaged $2,000.  

Meanwhile, according to data from the New York State Budget Office, residents have paid over $12 billion annually in additional taxes as a result of the SALT cap tax deduction.   

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New York business leaders believe the SALT cap is causing a significant shrinking of the tax base in New York, California, Illinois and New Jersey that impose high state and local taxes on residents. These states are witnessing a net decline in population as wealthier residents move to lower tax states like Florida and Texas.  

Rep. Occasio-Cortez, Rep. Mondaire Jones and Sen. Schumer did not respond to requests for comment on this story.