SALT cap to wipe out $323B of deductions

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WASHINGTON — The cap on the deduction of state and local taxes will prevent nearly 11 million taxpayers from deducting $323 billion in state and local tax payments from their federal tax returns, according to an unredacted audit released Wednesday.

House Ways and Means Committee Chairman Richard Neal, D-Mass., released the Treasury Inspector General for Tax Administration audit a day after TIGTA released a heavily-redacted version. The audit stemmed from a 2018 request by Neal that TIGTA look into the release process of an Internal Revenue Service and Treasury Department notice that the IRS intended to propose regulations curtailing workarounds of the $10,000 cap on the federal deduction for state and local taxes.

That cap, known as the SALT cap, was enacted as part of the 2017 Tax Cuts and Jobs Act. Local governments immediately raised concerns that the $10,000 federal cap would make homeowners more sensitive to property tax or income tax increases, perhaps restricting the ability of local governments to raise money to finance infrastructure. New York and several other states enacted workarounds through the establishment of new charitable tax credits, which led to the IRS decision to issue the notice.

TIGTA’s audit, based on an analysis of 2017 tax returns, made no recommendations, and found no fault in how the notice was issued.

“TIGTA determined the IRS began working on guidance for the state and local tax deduction shortly after the TCJA was enacted,” the audit found. “Guidance in this area was given priority due to taxpayer impact and emerging issues. In addition, TIGTA found that the process used for the issuance of Notice 2018-54 involved approvals from appropriate officials within and outside of the IRS.”

Treasury Secretary Steven Mnuchin personally approved the draft notice in mid-May 2018, about a week before its release, the audit found.

State and local groups oppose the IRS attempt to squash the workarounds. Late last year, the U.S. Conference of Mayors, the National League of Cities, the National Association of Counties, the Government Finance Officers Association and the International City/County Management Association sent a letter to the IRS urging that it withdraw its proposed regulations.

While her group does not have a position on the TIGTA release, GFOA federal liaison center Director Emily Brock said it provides "useful illustration of what happened and hints and some possibility of what may be to come."

"State and local governments across the country deserve not only confirmation of legislative intent but also a timely and orderly process in determining the intent, especially when it is foundational to state and local government taxing authority."

Repeal of the SALT cap remains a priority for those groups and for some lawmakers representing high-income areas affected by the cap. New York Reps. Nita Lowey, a Democrat, and Peter King, a Republican, introduced legislation in January to repeal the cap. The proposal is still awaiting an initial review by Neal’s committee.

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