President Donald Trump said he would consider changes to a controversial cap on the federal deduction for state and local taxes, one of the most divisive provisions of the 2017 Republican tax overhaul.
Trump told regional newspaper reporters in response to a question Wednesday that he’s “open to talking about” revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns.
“There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,” he said.
The remarks were reported earlier in The Stamford Advocate.
While Trump offered no specifics on the complaints or what he might do, even his hint held the potential for enormous interest in New York, Connecticut, New Jersey, and other high-tax states. The SALT cap has hit taxpayers there particularly hard, because of higher state levies, property values, and real estate taxes.
The cap is a key revenue raiser in the $1.5 trillion tax-code overhauls, which slashed rates for business and individuals. Lifting the cap would cost around $673 billion over a decade, according to the conservative Tax Foundation, a sum that might require raising the newly lowered 21 percent corporate rate to absorb the cost.
“I would anticipate a lot of pushback on that idea from conservatives on and off the Hill,” Ryan Ellis, a conservative tax lobbyist, said Thursday.
States with high local taxes are largely Democratic, and state officials have complained that the cap was designed to punish Democratic voters.
In three of the states most affected — California, New Jersey, and New York — Republicans lost 14 U.S. House seats in the 2018 midterms, accounting for about a third of the party’s overall losses. Additionally, two key lawmakers in crafting the Republican tax overhaul — former Representatives Erik Paulsen of Minnesota and Peter Roskam of Illinois — lost their seats where the unpopularity of the new law was a major issue in their campaigns.
Senator Bob Menendez, a New Jersey Democrat, vowed Feb. 5 to block the nomination of Michael Desmond to become chief counsel at the Internal Revenue Service over the cap. New York Governor Andrew Cuomo said recently that the SALT cap and other tax changes had prompted a $2.3 billion shortfall in state revenue last December; he blamed the cap for causing taxpayers to flee to states like Florida, which has no state income tax.
In Connecticut, the cap will cause taxpayers to pay an additional $2.8 billion in taxes for the 2018 tax year, according to state figures released last July.
Those three states, along with Maryland, sued the Treasury Department, IRS, and the Trump administration in Manhattan federal court last July, challenging the cap as infringing upon their state authority among other claims.
In New York’s Westchester County, the average property tax was $14,654, according to an April 2018 report by the New York State Association of Counties.
Democrats in Congress, including House Ways and Means Chairman Richard Neal of Massachusetts, have already vowed to tackle the SALT cap. “We are going to revisit the SALT deduction, I can tell you that,” he told a business forum on Nov. 27.
Still, it’s not clear that any changes would be enacted into law, given that many Republicans support the cap, as do many Democrats outside of the high-tax Northeast and California.
States have offered workarounds to the cap, but the IRS has blocked most of them, including one involving charitable donations in exchange for credits on property tax payments. The IRS hasn’t weighed in on a plan by Connecticut to offer owners of partnerships and other so-called pass-throughs a state credit equal to 93 percent of an owner’s paid state tax.
The workaround allows taxpayers to convert a state business into a federal deduction.