The debate over repeal of the cap on state, local deductions grows

Pressure is growing to use a proposed increase in federal tax enforcement as a way to offset a repeal of the $10,000 cap on the deduction for state and local taxes.

The Biden administration wants to increase funding for the Internal Revenue Service as a way of closing the tax gap between taxes owed and taxes that are paid.

Career staff at the IRS estimate that doing so would provide an additional $700 billion in tax revenue over 10 years.

Bloomberg News

Five former IRS commissioners wrote in an opinion piece published Tuesday by the Washington Post that the “IRS has been starved for resources.” They said the result has been a decline in taxpayer service and “a substantial decline in enforcement scrutiny of high-earners and large corporations with complex returns.”

Two of the five former commissioners believe the estimate of an additional $700 billion in net revenue is too conservative and could possibly be as much as $1.4 trillion.

Rep. Josh Gottheimer, D-N.J., co-chair of the congressional SALT Caucus, wants to use part of that revenue to pay for a repeal of SALT.

Gottheimer announced two weeks ago that he has written to Treasury Secretary Janet Yellen suggesting that increased IRS enforcement could pay for both a SALT repeal and infrastructure improvements.

“There is a cost for infrastructure investments and in eliminating the SALT cap, but there is a solution readily available,” Gottheimer said.

Gottheimer is a cosponsor of H.R.613, the bipartisan SALT Deductibility Act, which would fully repeal the SALT cap and has 106 cosponsors. A Senate companion is sponsored by Senate Majority Leader Charles Schumer, D-N.Y.

State and local government groups favor repeal because they say it contributes to fiscal stress in high tax communities and limits their ability to raise taxes.

“We have a standing policy that opposes federal preemption of state and local decision making authority,” said Emily Brock, director of the federal liaison center for the Government Finance Officers Association.

The expected revenue increase from more spending on IRS enforcement will take at least three years to reach a peak level, said Janet Holtzblatt, a senior fellow at the Tax Policy Center.

Holtzblatt said it will take time for the IRS to fully train new revenue officers and update its computer systems.

Liberal-leaning think tanks such as the Institute on Taxation and Public Policy argue against repeal because most of the benefits would go to families with incomes above $200,000.

A recent paper by Carl Davis, research director at ITEP, and Jessica Schieder, an ITEP tax policy fellow, found 67% of the savings would go to households earning more than $200,000. They also found that repeal would produce a larger average tax cut for white families compared to Black and Hispanic families.

“Repealing the SALT cap would worsen the racial income and wealth divides by primarily benefiting wealthy white households,” they wrote. “It would also likely crowd out other, much more progressive policies and programs from the upcoming infrastructure package while doing comparatively little to encourage progressive revenue raising at the state and local levels.”

David said in a phone interview Wednesday that repeal of the SALT cap would cost about $90 billion annually through the remaining four years before it expires at the end of 2025.

Paying for repeal with revenue from an increase in IRS enforcement would take away money that President Biden wants to use for paid parental leave, expanding pre-K, and increasing college affordability, Davis said.

Davis and Schieder have proposed an alternative approach that would replace the SALT cap with a broader cap on all itemized deductions claimed by high income households earning more than $400,000.

“If you earn less than that, you would get to deduct SALT,” Davis said. “For lawmakers who are concerned about the impact of the SALT cap on the middle class, this resolves it entirely. A $400,000 line is well above where the middle class ends.”