Lawmakers Seek to Roll Back Deduction Cap for State and Local Taxes


Lawmakers from both sides of the aisle in high-tax states are making efforts to reverse the provision that limits the deduction for state and local taxes at $10,000.

House Prepares for Debate on Doubling SALT Deduction Cap

The House has scheduled a procedural vote to pave the way for a bill that proposes doubling the SALT deduction cap for married couples filing jointly in the 2023 tax year, with an adjusted gross income of less than $500,000.

Support Expected to Grow with New House Member

Tom Suozzi, a Democrat, is expected to provide additional support for the effort. Suozzi, who was elected in a special election in New York on February 13, has been a vocal critic of the provision that capped the deductibility of SALT levies in the 2017 Trump tax overhaul. This issue played a significant role in his campaign as he fought to regain his seat in Congress.

Challenging Path to Becoming Law

Despite these efforts, experts believe that it will be challenging to pass the bill into law. The $10,000 cap on the deduction for state and local income taxes was introduced as part of the Trump tax overhaul to offset reduced tax rates in other areas. Advocates argue that this cap creates a system of double taxation. However, interest in changing this policy diminishes outside of wealthy, high-tax states such as New York, New Jersey, and California.

John Buhl, senior communications manager at the Urban Institute, states that “the debate over the SALT deduction cap has been ongoing for more than six years, and neither party has succeeded in pushing through any reforms so far, so it’s difficult to envision progress in this Congress unless something changes.” Buhl adds that although this issue is bipartisan to some extent, the true political base supporting it is limited to certain high-tax states and cities.

Finding Ways Around SALT Deduction Limits

In an attempt to mitigate the limitations imposed by the State and Local Tax (SALT) deduction caps, advisors are exploring alternative methods for clients. One such approach involves setting up pass-through entities like partnerships or S corporations. By channelling tax payments through these entities, the deductions become exempt from the cap restrictions.

The Proposed Bill

Representative Michael Lawler (R., N.Y.) has introduced a bill that aims to address this issue. If passed, it would only apply to the 2023 tax year, allowing the deduction cap to revert to the $10,000 level set by the 2017 bill thereafter. However, if Congress takes no action, the deduction cap will eventually vanish along with other provisions in the bill that are set to expire after 2025.

Political Considerations

Rolling out a bill of this nature is typical during election years. It appeals particularly to members of Congress from high-income states who seek reelection. Nonetheless, there is skepticism regarding its chances of success. Robert Pearl, a wealth advisor and co-founder of G&P Financial, believes that the bill is unlikely to clear the House and even if it does, it probably won’t gain much traction in the Senate.

Duane Thompson, president of consulting group Potomac Strategies, acknowledges that the politics surrounding this issue create significant obstacles. He predicts that the effort to temporarily increase the SALT deduction will ultimately fail. While there is division among GOP House Republicans on this matter, with the New York delegation in swing districts aiming for victory in the November election, a majority of Republicans remain opposed.

Providing Political Cover

Despite expecting potential failure, bringing this measure forward allows House Republicans in swing districts to claim they championed their constituents’ interests. The attempt to advance the bill to the floor serves as political cover for these representatives.

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