SALT Cap Critics Ask Yellen to Add Repeal to Biden Economy Plan

Democrats are making another push for the Biden administration to include a repeal of the cap on state and local tax deductions in its long-term economic program, a move that would give the write-off a White House seal of approval.

Representative Josh Gottheimer, a New Jersey Democrat, sent a letter to Treasury Secretary Janet Yellen Wednesday making a plea to include repeal of the $10,000 cap on the SALT deduction in the administration’s proposals to pump trillions of dollars into the economy with spending initiatives in part funded by tax hikes.

President Joe Biden is expected to release the social-welfare part of his plan in the coming days after unveiling an infrastructure-led program last month that omitted any SALT cap reference. The White House so far has been cool to requests to include a repeal on the SALT limit in their plans, and cited the hit to government revenue it would create.

SALT Cap Critics Ask Yellen to Add Repeal to Biden Economy Plan

List: Top Congressional Districts Losing State and Local Tax Deduction

Gottheimer said restoring the full SALT benefit could be paid for by increasing Internal Revenue Service enforcement efforts to collect taxes that go unpaid. IRS Commissioner Chuck Rettig estimated earlier this month that the difference in the amount of taxes owed and the amount actually collected could be as high as $1 trillion a year.

“Shrinking the tax gap would not only fund the full return of the SALT deduction to the hard-working families of New Jersey, but it would also provide substantial resources for infrastructure spending and encourage long-term tax compliance,” Gottheimer said in the letter. “All of this would be accomplished without raising rates on families or complexity in the tax system.”

Yellen has previously said she would work with Congress on ways to ease the “disparate treatment” across taxpayers from the deduction limit. But she hasn’t committed to any particular plan.

The SALT deduction has become a critical point of friction between some House Democrats from several high-tax states, who say it’s imperative to repeal a Trump-era tax change that reduced valuable tax breaks for their constituents. Repealing the deduction also presents a political dilemma, because it would largely flow to high earners at a time when Democrats are talking about raising levies on the rich. More than half of the tax benefits from a SALT cap repeal would go to those making more than $1 million annually, according to the non-partisan Joint Committee on Taxation.

Representative Tom Suozzi, a New York Democrat, said that he would support raising the top individual tax rate to 39.6% from 37% to offset the cost of restoring the tax deduction.

“Then with the argument that the wealthiest people are getting the benefit of SALT, you say, ‘No, We are having the wealthiest people pay for it as well,’” Suozzi said Wednesday at a U.S. Conference of Mayors event.

Biden has also embraced a 39.6% tax rate, but is likely to propose using that money for paying for his social-welfare program.

White House Press Secretary Jen Psaki has said that lawmakers would need to come up with ways to fund a more generous SALT deduction.

“People are talking to us. They’re open minded,” Suozzi said referring to White House officials. “They haven’t said no, they haven’t said yes, but they are talking to us.”

Repealing the SALT cap has support from key members in Congress, including Senate Majority Leader Chuck Schumer. Even if SALT isn’t included in the Biden plan, it could be added during congressional negotiations. Lawmakers are also likely to look at other options beyond just repealing the SALT cap, which would cost $88.7 billion for 2021 alone, according to the Joint Committee on Taxation.

Some cheaper options, such as increasing the threshold of the cap or limiting the tax breaks to those under a certain income, could make the tax break more generous while controlling the overall cost.

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