House panel votes for 2-year SALT repeal

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Tax-exempt municipal bonds would be more attractive for high-income retail customers under legislation the House Ways and Means Committee approved Wednesday to permanently restore the top individual tax rate to 39.6%.

The additional revenue from increasing the current top rate of 37% would help pay for a temporary two-year suspension of the $10,000 cap on the federal deduction for state and local taxes.

The legislation, which the committee approved 24-17, is expected to pass the Democratic controlled House with limited Republican support from lawmakers in high tax states. But it has no chance of being considered by the Republican majority in the Senate next year.

Ways and Means Committee Chairman Richard Neal, D-Mass., said he would need to talk to House Speaker Nancy Pelosi, D-Calif., about whether the bill would be heard on the floor later this month or sometime early next year.

Even if the bill does not become law, it does send a message that congressional Democrats are prepared to restore the higher individual tax rate of 39.6% and an unlimited deduction for state and local taxes if their party gains control of both chambers in the 2020 election.

In that event, the earliest that the higher individual tax rate and repeal of the SALT deduction could take effect would be 2021.

Repeal of the $10,000 cap is supported by a number of local government and public employee groups who say the cap constrains the ability of cities, towns, villages, and school districts to raise additional revenue.

The U.S. Conference of Mayors, National League of Cities, National Association of Counties, International Association of Fire Fighters and the National Association of Police Officers were among the groups that sent the committee letters of support for the bill.

The impact of the SALT cap has been the greatest in high income, high tax states where many residents pay substantial property taxes and income taxes.

New York, New Jersey, Connecticut and Maryland -- which are four of those states -- are appealing a September ruling by U.S. District Court Judge J. Paul Oetken in Manhattan upheld the constitutionality of limiting the deduction.

Democrats were unanimous in opposing the 2017 Tax Cuts and Jobs Act that implemented the $10,000 SALT cap, but they were not unanimous Wednesday in supporting the repeal effort.

Ways and Means Committee Member Stephanie Murphy, D-Fla., broke with her party on the issue by announcing she would oppose the bill because the SALT cap is not a pressing issue for her constituents in central Florida.

Meanwhile, Republican Rep. Tom Reed of New York announced his support for the bill during the committee meeting.

The SALT cap was a key issue for voters in New Jersey in the 2018 election, said Rep. Bill Pascrell, D-N.J., citing it as the reason Republicans lost four House seats in the state.

The average SALT deduction taken by New Jersey homeowners in 2017 was over $19,000, Pascrell said.

Two thirds of homeowners earning between $75,000 to $100,000 in New Jersey used the SALT deductions, Pascrell said.

Rep. Tom Suozzi, D-N.Y., highlighted his state’s position as the nation’s largest donor state to the federal government.

The liberal-leaning The Institute on Taxation and Economic Policy estimates the provision restoring the top income tax rate offsets less than a quarter of the cost of repealing the cap.

“In order to claim that their proposal is fully paid for, the Democrats wrote their bill to repeal the SALT cap entirely for only two years, 2020 and 2021, while making the increase in the top rate permanent,” ITEP said.

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