Senate Democrats try to repeal SALT regulation

Register now

A group of 11 Senate Democrats announced Tuesday what’s likely to be an unsuccessful effort to repeal a regulation finalized by the Internal Revenue Service last month involving the $10,000 federal cap on state and local tax deductions for individual taxpayers.

The regulation is targeted at ending workarounds by state and local governments that have been enacted since the cap was included in the 2017 Tax Cuts and Jobs Act.

The Senate Democrats, including all six from New York, New Jersey and Connecticut, said they will invoke the Congressional Review Act to force a floor vote on the regulation.

A similar measure is expected to be introduced in the House by Democratic Rep. Rebecca “Mikie” Sherrill of New Jersey.

Although the rollback could not be filibustered in the Senate and would require a only simple majority to pass, Senate Democrats are unlikely to gain the support of the four or more Republicans they would need to gain passage.

House Democrats are in the majority in that chamber and are likely to have enough votes to support the rollback.

Even in the unlikely event that a rollback successfully passes Congress, it is assured a presidential veto. Achieving a two thirds majority in each chamber to override a veto would be unattainable.

The Congressional Review Act, also known as CRA, was used successfully 16 times in the last Congress by the Republican majorities in both chambers to overturn regulations promulgated during the Obama administration.

CRA also was used successfully one other time by Republicans during the 107th Congress in 2001-2002 shortly after the end of the Clinton administration.

The Senate Democrats who are invoking the CRA this time want to continue to draw attention to the SALT cap.

“Trump’s tax law was a massive hit job on middle class taxpayers in New Jersey and other economic powerhouse states where the cost of living is high, and we are going to keep fighting with every tool we’ve got,” Sen. Robert Menendez, D-N.J., said in a press statement. “This CRA will reverse the flawed guidance issued by the IRS last month, which crippled state level efforts to protect middle class families from even higher property tax burdens.”

Sen. Chris Murphy, D-Conn., called SALT cap “a clear partisan gimmick designed to hurt states like Connecticut.”

The limit on the SALT deduction caused an estimated 10.88 million individual taxpayers to lose $323.1 billion in tax deductions for the 2018 tax year, the Treasury Inspector General for Tax Administration reported in February.

The impact has been the greatest in high income, high tax states where many residents pay substantial property taxes and income taxes. Local governments have raised concerns that the $10,000 federal cap might make homeowners more sensitive to property tax or income tax increases, perhaps restricting the ability of local governments to raise money to finance infrastructure.

State and local government groups also have criticized the cap.

U.S. District Court Judge J. Paul Oetken in Manhattan heard oral arguments last month in a federal lawsuit filed by New York, New Jersey, Connecticut and Maryland that the SALT cap has encroached on their sovereign authority to determine their own taxation and fiscal policies.

A tandem controversy predating the SALT cap involves state laws that created tax credits of up to 100% for private school donations, often to scholarship funds, which can be used by donors to also claim federal charity deductions.

The final IRS and Treasury regulations limit a taxpayer who claims a state tax credit to claiming only the portion of their charitable donation not covered by the state.

Under the final regulation, the IRS said a taxpayer who receives a 70% state tax credit of $700 for a $1,000 donation would be left with “a federal charitable contribution deduction of $300.”

State tax credits of 15% or less are exempted. And the regulation does not limit deductions, which reduce taxable income, unlike tax credits, which are more generous because they directly reduce taxes owed.

For reprint and licensing requests for this article, click here.
SALT deduction State taxes Property taxes Tax rules IRS Washington DC
MORE FROM BOND BUYER