House Approves Bill To Suspend Cap. On Some Tax Deduction

On Thursday, the House of Representatives which is controlled by Democrats approved a bill to suspend the $10,000 cap on state and local tax deductions that came with President Donald Trump’s massive 2017 tax law for two years. These deductions are quite popular, especially in high-tax and heavily Democratic states like New York, New Jersey and California.

The bill to suspend the cap passed the House by 218 votes to 206 votes. Five Republicans from high-tax Northeastern states went against their party to support the Democrats’ bill because it would help many of their constituents.

Prospects for the bill, passed through the House as part of a year-end legislative rush, are dim in the Senate, where Republicans hold a 53-47 majority.

In the proposed bill, the lost revenue would be paid for by raising the top individual income tax rate by nearly 40% for six years from the current 37%. The Congressional Budget Office has estimated that the legislation would cost $42 billion in reduced tax revenue from 2020 to 2024. The bill would as well increase the maximum deduction for some expenses for teachers, and also create a new deduction for certain expenses for first responders.

The action on the bill on Thursday is followed by House' approval of a $1.4 trillion government-wide spending package that would prevent a federal shutdown this weekend and give Trump steady funding for his U.S.-Mexico border fence; as well as renewal of a raft of expired and expiring tax breaks, including deductions for mortgage insurance premiums, college tuition and large medical bills.

The cap on the SALT deduction limits to $10,000 the total amount of property taxes or state or local taxes that consumers can deduct on their federal returns. Democratic candidates in suburban districts in high-tax states had campaigned last year on eliminating the cap on state and local deductions.

But Republican lawmakers and some liberal Democratic critics maintain that removing the cap would cost hundreds of billions of dollars in revenue and be of great benefit to the affluent and not the middle class.

This SALT cap was imposed in 2017 to help pay for the sweeping package of individual and corporate tax cuts. This law took effect Jan. 1, 2018 and happened to be the most extensive rewrite of the U.S. tax code in three decades, adding an estimated $1.5 trillion to the increasing deficit. The law offered high tax cuts for corporations and the wealthiest Americans, and more modest reductions for middle- and low-income individuals and families. While the law slashed the corporate tax rate permanently from 35% to 21%, its tax cuts for individuals expire in 2026.

Conservatives have argued that unlimited state and local deductions will result in a federal subsidy for the wealthy in high-tax states.