Republicans are open to raising the state and local tax (SALT) deduction cap that the party championed and put in place under former President Trump seven years ago as they aim to win total control of government in 2024.
The issue is especially potent in higher-tax blue states like California and New York that have a significant number of House Republicans defending battleground seats — Republicans who have long called to raise or do away with the SALT cap.
Trump earlier this month signaled a reversal on the SALT deduction cap, saying on Truth Social that he would “get SALT back, lower your taxes, and so much more.”
Trump signed into law a $10,000 cap on SALT deduction as part of the Tax Cuts and Jobs Act (TCJA) in 2017. At the time, Republicans and his own administration argued that the new caps would “[get] the federal government out of the business of subsidizing states,” as then-Treasury Secretary Steven Mnuchin put it.
But Republicans now acknowledge that members of their party in those high-income states will likely determine control of the lower chamber — and depending on the balance of power, could have a major say in how Republicans address the tax policy.
“If we have a thin majority, it means that those SALT-state Republicans have a larger and more proportional voice in the conversation,” said Rep. Andy Barr (R-Ky.), a member of the Financial Services Committee. Barr noted he voted in favor of the cap on SALT and praised the Trump tax bill’s effect on businesses moving out of high-tax states like New York and California.
Of the 11 House seats rated as toss-ups in The Hill/DecisionDesk HQ’s election forecast, six are in New York and California.
For those Republicans, the SALT deduction cap has been a major issue.
Rep. Nick LaLota (N.Y.), a first-term Republican, said he praised Trump for his new position on SALT when the former president held a rally on Long Island earlier this month.
“I said, way to go, Mr. President, way to put this on the table. This is what suburban constituents in blue states want. It’s right to bring us relief that we need,” LaLota said.
LaLota said he and other pro-SALT deduction colleagues “have been screaming from the top of this mountain here in Washington that we need some relief on this issue, and we’re eager to build new relationships [with] people who want to be pro-SALT. The top of that list is the former president.”
In that environment, members from red states are staying open to changing the SALT deduction.
“We have members from high-tax states who, you know, feel like it’s punitive for them to have to pay state and local taxes on top of high federal taxes. So, it’s a good debate to have, along with all the other provisions that we want to make permanent,” House Budget Committee Chair Jodey Arrington (R-Texas) said.
How, exactly, Republicans will fulfill Trump’s promise on tax policy is unclear. Several Republicans noted that Trump did not specifically outline how he wants to address SALT.
Rep. Jason Smith (R-Mo.), the chair of the powerful House Ways and Means Committee that will head up how House Republicans address tax policy next year, ruled out a total elimination of the cap if Republicans keep control of the House.
“The president’s called for us to address SALT. There’s going to be a cap on SALT. It’s not going to be unlimited. Because there is no way in a Republican House of Representatives that you can pass an unlimited SALT deduction,” Smith said Monday on CNBC, adding that it would “definitely be a higher cap.”
One option is removing the so-called marriage penalty, which applies the $10,000 SALT deduction cap to married couples who file their taxes jointly and who make less than $500,000 per year.
Democrats and a few Republicans blocked GOP legislation in February that would have increased the deduction cap from $10,000 to $20,000, thereby keeping the so-called marriage penalty intact.
Rep. Warren Davidson (R-Ohio) said that the SALT cap issue could be used as a leverage point for other tax negotiations.
“I think there’s a good path to include changes in SALT as a part of tax reform,” Davidson said, mentioning expensing of research and development costs, which was a priority for Republicans in a recent tax bill, along with other business deductions, that failed to make it through the Senate over the summer. “SALT is one of the things that might get us to some deal.”
Democratic opposition to the SALT cap has been entrenched ever since it passed in 2017.
Senate Majority Leader Chuck Schumer (D-N.Y.) recently blasted it, calling it a “nasty piece of legislation.”
“I’ve always been for eliminating the cap on SALT. I think it was a nasty piece of legislation, supported by Donald Trump, aimed at the blue states, which help the people of their states in many ways,” he told reporters earlier this month.
With significant portions of the tax code set to expire next year, the next Congress is poised for a major tax fight in 2025, though Sen. Mike Rounds (R-S.D.) recently opened the door to negotiations in the lame-duck session.
Major tax provisions in addition to SALT that could feature prominently in negotiations are the corporate tax rate, the 199-A pass-through deduction, various business credits, the child tax credit, the earned income tax credit and tax bracket configurations.
The taxation of partnerships, which are a type of commercial pass-through entity, could be a serious sticking point in the negotiating process, as Republicans want to defend deductions for pass-throughs while the IRS, recently beefed up by Democrats, has recently set up an entirely new division for taxing them.
“The IRS audit rate for large partnerships has dropped to less than 0.5 percent since 2007. About 80 percent of audits conducted don’t find tax noncompliance. This may suggest that IRS isn’t choosing the riskiest returns to audit or doesn’t know how to find noncompliance in these businesses,” the Government Accountability Office said in a report last year.
On Monday, the IRS released draft form 7217, which compels company partners to report “all distribution of property that a partner receives from a partnership.”