Republicans in Congress have hinted at rolling out a second round of federal tax cuts over the past few months, outlining a broader plan to have the individual rate cuts become permanent under the revised code rather than letting them expire in 2025. The majority party in the House of Representatives saw this as a measure that would boost Republicans nationwide ahead of the November midterm elections, amplifying the positive points of President Donald Trump’s Tax Cuts and Jobs Act. However, some say that the Republican leadership is looking at shelving the move, possibly even dropping it, as fears of political backfire surface.
One of the main provisions of the plan was to make permanent the $10,000 annual cap for state and local tax (SALT) deductions. Though, this was one of the most disputed provisions of the federal tax overhaul with elected leaders that represent constituents in states with high taxes.
Currently, as stated in a report from Bloomberg, Republican lawmakers in high-tax states like New York, New Jersey, Minnesota, Illinois, and California, among others, are in a tricky position of either supporting the cap, or voting against tax cuts backed by their party if they are included. Those that live in states with higher than average taxes would not be able to deduct as much, compared with others in states with lower taxes, leading to a disparagement in annual net income.
The SALT deduction has been around since the institution of the federal income tax in 1913. Those in favor of the deduction cite that state and local income, real estate, and sales taxes are mandatory. Advocates for the deduction say that doing away with it would basically constitute double taxation.
A report from Smart Asset states that the Congressional Budget Office (CBO) reveals that the SALT deduction costs the federal government “trillions” in missed revenue opportunities, with SALT deductions and other tax expenditures adding up to over eight percent of GDP in 2017 – nearly half of all federal revenues projected for that year. Therefore, those that propose sweeping government programs are opposed to such deductions, suggesting that the government must accrue more income to pay for things like a growing Medicaid program, and the expansion of other government-sponsored plans.
Those making $100,000 per year are most affected, with 88 percent of earners receiving SALT deduction benefits. Filers with incomes over $500,000 would be greatly affected by the change, but losses in deductions would also be offset by the decrease of the top personal income tax rate – from 39.6 percent to 37 percent – as well as the doubling of the estate tax deduction and cutting the capital gains rate from 23.8 percent to 21 percent.
Lower income filers, those under $100,000, would not feel strain on their checkbooks, but indirect consequences would be seen as state and local government having less money to spend on programs if the deduction is capped.
Regardless, in low-tax states like Oklahoma, South Carolina, Texas, and Alaska, among others, the SALT cap is not a priority issue as many are more concerned with making individual federal rate cuts permanent.
For Republicans running for re-election, the smart thing to do would be to educate voters on some of the other provisions of a second round of tax cuts. In addition to making the individual changes permanent, the federal tax package would make changes to retirement savings accounts and create special tax breaks for startup companies, helping people see more of their taxed income invested back into their lives.
