An overhaul of the state and local tax deduction cap that's important to the municipal finance community is part of the House’s latest version of the Build Back Better plan.
The revised House plan would raise the current $10,000 cap on SALT deductions that’s in place through 2025 to $72,500 and extend it through 2031.
Meanwhile, Sens. Bernie Sanders, I-Vt. and Bob Menendez, D-N.J., Wednesday proposed their own SALT overhaul that they said would ease pressure on the middle class while retaining the tax for upper-income earners.
The SALT overhaul is part of larger negotiations over the $1.75 trillion Build Back Better bill, which House Speaker Nancy Pelosi has said she wants the House to vote on as soon as Thursday night or Friday. A vote on a companion $1.1 trillion bipartisan infrastructure bill that's also being followed by muni market participants may be held soon after.
A SALT overhaul is important for state and local governments who argue the cap cramps their own tax-raising flexibility. But buysiders say lifting or suspending the cap could hurt demand for tax-exempt bonds, especially paper from high-tax states like California, New York and New Jersey.
The federal cap was enacted as part of the Tax Cut and Jobs Act of 2017.
While the latest BBB bill, which was released Wednesday afternoon, now includes SALT, other muni priorities like tax-exempt advance refunding were left out and a direct-pay bond program remained on the cutting room floor. A new corporate minimum tax that muni advocates say would hurt institutional demand for bonds stayed in the bill.
In a House Rules Committee hearing Wednesday on the latest BBB plan, California Democrat Rep. Mike Thompson said the $10,000 cap “exerts pressure on state and local budgets."
New York and New Jersey lawmakers Thursday called the inclusion of SALT reform in the House bill “encouraging.”
“We will continue to work with House and Senate leadership to ensure the cap on the SALT deduction is repealed,” Reps. Josh Gottheimer, Tom Suozzi and Mikie Sherrill, all Democrats from New York and New Jersey, said in a joint statement. “No SALT, no deal.”
Under Sanders' proposal, the $10,000 cap would remain in place but only for families with an annual income of at least $400,000. Separately, on Tuesday Senate Majority Leader Chuck Schumer proposed eliminating the cap for five years but reinstating it in 2026 at the current $10,000 cap.
“What’s most important is there is now an understanding that it would be totally unacceptable from a financial and a political point of view to give massive tax breaks to the wealthiest people in this country by completely repealing the SALT cap,” Sanders said Tuesday at a news conference with Menendez.
The Joint Committee on Taxation Thursday released its estimates of the revenue provisions of the House BBB text, saying it would raise $1.48 trillion in new tax revenue over the next decade.
The SALT provision would cost $222 billion through 2026 but end up with a final price tag of $2 billion by 2031 as it would bring in roughly $220 billion by extending the cap through 2031.
The corporate minimum tax would generate just under $320 billion, the biggest revenue generator in the bill.
If passed by the House, the reconciliation bill would head to the Senate, where Schumer said the goal would be to pass it before Thanksgiving.
In a news conference Thursday morning, Pelosi said the reconciliation bill is “the greatest monumental historic piece of legislation that any of us will ever be part of.”
