Members of New Jersey’s congressional delegation are telling the White House they will not support any tax law changes to fund President Joe Biden’s $2 trillion infrastructure plan unless the current $10,000 cap on the federal state and local tax deduction gets removed.
Likewise, Gov. Phil Murphy joined with Democrat governors of six other states in penning an April 2 letter to President Biden, urging the cap’s repeal.
Reps. Mikie Sherrill and Tom Malinowski led a group of eight House Democrats who wrote to Treasury Secretary Janet Yellen on the issue April 1. They told Yellen that the $10,000 limit on the state and local tax (SALT) deduction has “increased the movement of higher-income taxpayers to other states,” eroding the tax base in states like New Jersey.
‘No SALT, No Deal’
“For our constituents and millions of taxpayers throughout the country, the SALT deduction cap has imposed a harmful double tax and has created one of the largest marriage penalties in the federal tax code. We could not vote for a bill that has a meaningful tax impact on our constituents unless it restores SALT deduction relief to our middle-class families,” the letter from New Jersey House members including Josh Gottheimer, Frank Pallone, Bill Pascrell, and Albio Sires.
Prior to 2017, taxes paid to state and local governments could be deducted against federal income taxes. The 2017 Trump tax law, the Tax Cuts and Jobs Act, changed this, setting a $10,000 a year cap on the amount of state and local taxes taxpayers could deduct on their federal returns.
“We say, ‘No SALT, no deal,’” Gottheimer and Pascrell said in a recent joint statement they issued with New York Rep. Thomas R. Suozzi (D). Pascrell and Suozzi sit on the House Ways and Means Committee, which has jurisdiction over tax policy.
In a interview with North-JerseyNews.com, Gottheimer stated he support the American Jobs Plan “with a big line in the sand (that it must reinstate) the state and local tax (SALT) deduction. You are talking about hitting people with higher tax rates here without addressing SALT, that is unconscionable…they whacked us in 2017 and we will get whacked again.”
The “No SALT, No Deal” stance from some House Democrats could pose a significant hurdle to Biden’s infrastructure plan, given the razor-thin majority that Democrats hold in the chamber. Additionally, both House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) have supported repealing the $10,000 cap.
“The SALT cap doesn’t just hurt our taxpayers but our communities too, which face savage cuts to vital public services if relief is not enacted. New York and New Jersey are also the largest net donors to the federal government and annually contribute more than we receive,” Gottheimer, Pascrell, and Suozzi said in their press statement. “Therefore, we will not accept any changes to the tax code that do not restore the SALT deduction and put fairness back into the system.”
Murphy: Cap Is ‘Unacceptable’
Murphy’s letter to Biden said that taxpayers from the Garden State are paying the federal government an additional $3 billion annually now that the SALT deduction is capped at $10,000. The governors of New York, Connecticut, California, Oregon, Illinois, and Hawaii signed the letter as well.
The governors framed the move to cap the deduction as a political one by the Trump Administration and Republicans in Congress to punish Blue States.
“Like so many of President Trump’s efforts, capping SALT deductions was based on politics, not logic or good government. This assault disproportionately targeted Democratic-run states, increasing taxes on hardworking families. This was unacceptable then, and is simply untenable given the dire economic conditions caused by the pandemic,” the seven governors wrote to Biden.
White House Response
Removing the cap is not a revenue raiser, but rather a revenue loser for the federal Treasury at a time when the White House is seeking ways to raise revenue for its infrastructure plan.
White House press secretary Jen Psaki said as much when asked where President Biden stands on Democrats who are saying “no SALT, no deal on infrastructure.”
“If Democrats want to propose a way to eliminate SALT, which is not a revenue raiser, as you know, it will cost more money and they want to propose a way to pay for it, and they want to put that forward, we’re happy to hear their ideas,” Psaki said at an April 1 press briefing.
SALT Break Detractors
New Jersey is one of several states that disproportionately benefit from the tax break, even with the $10,000 cap. According to a recent report by the Tax Foundation, New Jersey was one of seven states that together claimed more than half of the value of all SALT deductions nationwide in 2018. The others were California, New York, Texas, Maryland, Illinois, and Florida.
“The SALT deduction tends to benefit states with many higher-earners and higher state taxes. This was true prior to the SALT deduction cap and remained the case in 2018,” the Tax Foundation’s Garrett Watson wrote in the January 2021 report.
Likewise, the Brookings Institution said in a September 2020 paper that repealing the cap “would be a massive tax cut for the rich” with “57% of the benefit going to the top one percent.”
But Sherrill, Malinowski and the other lawmakers told Yellen the SALT deduction benefits middle-income families in high cost of living areas as well. “There is a misconception that the SALT deduction doesn’t help middle-class families who need relief, instead helping only the well-off. However, in high cost of living areas, SALT does in fact make a critical difference in helping make ends meet for our middle class,” the House lawmakers wrote.
“From teachers to law enforcement officers, many of our constituents depend on this deduction to afford the high cost of living in their area,” they added.
An earlier 2020 report by the Tax Foundation noted that New Jersey has the highest effective property tax rate on owner-occupied property at 2.21%, followed closely by Illinois (2.05%) and New Hampshire (2.03%).
Murphy said in his letter that federal tax law imposes no cap on how much businesses can deduct in state and local taxes “while middle-class Americans are struggling under this federal tax burden.”
Malinowski, who represents New Jersey’s 7th district, urged the Ways and Means Committee to repeal the cap in March 23 testimony. He told the panel that, according to New Jersey’s Society of Certified Public Accountants, more than 60% of their individual and family clients making under $200,000 a year were affected by the cap.
“How do we justify this when so many others who are actually wealthy benefited so much from the 2017 tax bill? How do we defend it when the effective corporate tax rate in America has dropped to 12 percent as a result of that bill?”
Both of New Jersey’s senators, Bob Menendez and Cory Booker, favor repealing the cap and have cosponsored legislative proposals to do so.