House Democrats push for state and local taxes relief in appropriations bill

Despite roadblocks, five House Democrats are still fighting for relief on the $10,000 limit on the federal deduction for state and local taxes, known as SALT. 

Rep. Mikie Sherrill, D-N.J., sent a letter to leaders of the House Appropriations Subcommittee on Financial Services and General Government, urging colleagues to deny the IRS funds to block state-level SALT cap workarounds.

Signed by Reps. Josh Gottheimer, D-N.J.; Tom Malinowski, D-N.J.; Katie Porter, D-Calif.; and Tom Suozzi, D-N.Y., the letter requests a provision be added to the fiscal 2023 appropriations bill.

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The letter specifically calls out legislation passed in New York and New Jersey that allows local jurisdictions to create charitable funds offering property tax credits to homeowners who contributed. The law would have allowed taxpayers who itemized deductions to claim a charitable write-off for their donations. 

However, the IRS and the U.S. Department of the Treasury barred this workaround in 2019, saying the receipt of a SALT credit in return for charitable contributions would constitute a “quid pro quo.”

“Congress didn’t give the IRS permission to interpret the tax law as they see fit, which they’ve done by dismantling the charitable tax deduction,” said Gottheimer, who co-chairs the SALT Caucus.

“We must do everything we can, including restoring the SALT deduction, to help cut taxes and make life more affordable for families and small businesses,” he added.

The $10,000 SALT limit, enacted by former President Donald Trump’s signature tax overhaul, has been a pain point for high-tax states, such as New York, New Jersey and California, because residents can’t deduct more than $10,000 in state and local levies on their federal returns.  

With a slim Democratic House majority, the SALT cap was a big issue in Build Back Better negotiations, and lawmakers in November passed an $80,000 SALT cap through 2030 as part of their spending package. But Sen. Joe Manchin, D-W.Va., blocked the plan in the Senate.

The push for SALT reform faced another setback in April when the Supreme Court rejected a challenge from New York and three other states to overturn the legislation.

Garrett Watson, a senior policy analyst for the Tax Foundation, described the latest move from SALT relief advocates as “an interesting approach” but expects resistance from lawmakers on both sides of the aisle.

“The appropriations season is already a pretty turbulent time between both parties,” he said, pointing to ongoing disagreements about IRS funding and the agency’s direction.

Another concern may be the types of taxpayers attempting to take advantage of state-level SALT cap workarounds, who are often “on the more sophisticated side, which probably correlates with income,” Watson said.

Current workarounds in some states are only available to so-called pass-through businesses, with profits flowing to owners’ individual tax returns. SALT relief opponents have long argued that lifting the cap may primarily benefit wealthy households.

If repealed altogether, the top 20% of taxpayers may see over 96% of the relief, according to a Tax Policy Center report, affecting only 9% of American households.