The dirty secret in Washington right now is that everyone can be Joe Manchin or Kyrsten Sinema if they want. If any Democrat has a pet issue or a particular gripe, they can derail the tortuous negotiations over the massive social-spending bill being pushed by the Biden administration. This doesn’t mean that everything is up for grabs, because after all, there are few issues contentious enough to force such ultimatums. One of them though is the state and local tax deduction, or SALT, and this dry provision of the tax code could still upend Biden’s entire legislative agenda. A number of northeast Democrats have made their support for a reconciliation bill containing Biden’s priorities contingent on tweaking SALT. “No SALT, no deal,” as Tom Suozzi of New York has repeatedly said.
Until 2017, all state and local taxes could be deducted from filers’ federal income tax. But under the Republican tax cut package passed that year, the deduction was capped to only the first $10,000 in state and local taxes. This made little difference to most people. But to a specific slice of homeowners in blue states, it was a nightmare. In states such as New York, New Jersey, and Illinois, the lower cap significantly increased the tax burden for many living in areas where property values are high. For most Republicans, this was easy to support at the time. After all, it penalized more liberal states with higher taxes and more services than red states. But, many Democrats have since grown skeptical about restoring the full SALT deduction — after all, many of the people it helps are rich. A study from the Brookings Institution found that almost all the benefits of restoring the full SALT deduction would help the top 20 percent of wage earners. It’s met with deep skepticism from Democrats on the left wing of the party like Alexandria Ocasio-Cortez and within the Biden White House. Now, with the scope of the Biden plan being steadily shrunk, the question is how much room is left to repeal the cap on the SALT deduction.
Suozzi called the issue “existential.” The Long Island congressman described the cap on the SALT deduction not just “as a body blow to a lot of homeowners” that is contributing to an exodus from New York. Democrats also argue that the SALT cap was a way for Republicans to penalize blue states for greater levels of government services than red states. “This is money that New Jerseyans have used to invest things we care about. This should be rewarded, not quite frankly punished,” said Mikie Sherrill of New Jersey.
Josh Gottheimer of New Jersey pushed back on the notion that removing the cap would benefit the rich, saying the median property tax in Bergen County was $15,000. He called lifting the cap on SALT about protecting the households of cops and firefighters and teachers.
Beyond pocketbook issues, the Democrats warn there would be significant political repercussions without any SALT relief. The party won their current House majority in 2018 in suburban districts where moderate voters saw their taxes go up after SALT was capped: Democrats picked up four House seats in New Jersey alone, along with seats in New York, California, and suburban Chicago.
“This issue is critical to people in my district,” said Sherrill, who won a traditionally Republican seat in New Jersey in 2018. “This is what Democrats ran on in 2018 and really need to see this addressed in the reconciliation bill.” She would not go as far as Suozzi but made clear her bright line was “addressing SALT or no deal,” although she added she was advocating for full repeal.
The question is what the wiggle room is for Democrats. Full SALT repeal is estimated to cost up to $85 billion in lost revenue, a significant sum in the shrinking bill and would price out other Democratic priorities. Of course, the top Democrat in the House is from California and the top Democrat in the Senate is from New York, so there is still plenty of incentive for some SALT repeal. “I think there is a variety of people across the House and Senate and various layers of leadership whose constituents are impacted,” said Lauren Underwood of Illinois. “This is not some isolated thing.”
Plus leadership has no choice, with the bloc of Democrats committed to a SALT fix. “There just isn’t a path forward here without addressing SALT,” said Sherrill.