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A debate among Democrats on whether to reinstate unlimited state and local tax deductions has emerged as a critical hurdle in the party’s path to advancing President Joe Biden’s sweeping infrastructure plan.
Unlike most of former President Donald Trump's policies, which the Biden administration has aimed to largely undo, the institution of the so-called SALT caps by Congress in 2017 has received support among elements of the Democratic Party — not least of all from the president himself.
The Trump tax bill put a $10,000 limit on how much taxpayers could deduct from their federal income taxes, but many people in high property-tax states, particularly in the Northeast, pay much more than that and lost a valuable deduction.
Progressive groups have maintained the deduction predominantly benefits the wealthy, and the White House has signaled it wants to keep the caps because they can help pay for the infrastructure plan. Calls to reverse the caps, and restore the unlimited deduction, however, have emanated from a growing number of moderate Democrats predominantly from the Northeast and California — including House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Chuck Schumer, D-N.Y. — where property-owning residents of those high-tax states stand to benefit from the relief on their federal taxes.
The debate puts Biden, who campaigned on reversing most of Trump's tax moves, including the SALT caps, in the unusual spot of siding against reversing a Trump policy.
Democratic strategists and lawmakers say the battle should come as no surprise: Trump, they say, set up this very fight to occur when he included the controversial caps on SALT deductions in the Tax Cuts and Jobs Act. The measure has, as intended, divided Democrats into a wealthier, establishment camp that favored the uncapped deductions, and a more populist and progressive wing that outspokenly supports higher taxes on the wealthy to pay for social programs and reduce income inequality.
“Democrats haven’t shown that they’re all in this together. And Mr. Biden doesn’t have a lot of wiggle room here,” said Glenn Totten, a veteran Democratic strategist.
“For now, all this debate does is make the job of Mitch McConnell and the Republicans easier because it frames it as a blue state versus red state issue,” he added. “Which was one of the intentions of the SALT caps in the first place.”
'Not a revenue raiser'
The White House has repeatedly signaled that SALT caps are the rare policy issue from the Trump era that Biden supports.
During press briefings last week, White House press secretary Jen Psaki responded to multiple questions about the SALT issue by pointing out that undoing the caps “is not a revenue raiser,” even after it was pointed out to her by reporters that Democrats who support reversing the caps could easily sink an infrastructure bill.
Axios reported earlier this month that senior members of the administration felt that keeping the caps in place is “good policy” because they bring tens of billions of dollars in federal tax revenue.
A Biden administration spokesperson responded to questions from NBC News about the White House’s position on SALT by pointing to Psaki’s comments at recent briefings.
Progressive groups and strategists have said they support the SALT caps because they do, in fact, make a large portion of high earners pay more in federal taxes, which can then be used to fund progressive programs.
"It's necessary to tax the wealthy, which has become a widely popular position. It's clear that needs to happen. That is one way to do it," said Maura Quint, the executive director of Tax March, a progressive group that advocates for tax fairness.
But so far, those lawmakers who want to reverse this particular Trump policy aren't budging.
Eight moderate House Democrats, mostly from the blue states where residents were hammered by Trump’s SALT caps, penned a letter earlier this month, saying they were a hard “no” on Biden’s plan if it didn’t include lifting them.
“We’re going to keep fighting until this is part of the bill. It’s as critical as a road or a bridge or a tunnel, which is why we are going to keep fighting for it until the end,” Rep. Josh Gottheimer, D-N.J., who was one of the eight to sign the letter, said in an interview.
“The SALT deduction cap was designed to target blue states,” Rep. Mikie Sherrill, D-N.J., who also signed the letter, said in an email. “We are being punished for running programs that help our citizens.”
Rep. Tom Suozzi, D-N.Y., another signatory, told NBC News that, “If we don’t get it done now, we won’t get it done. I’m pushing for a full repeal.” He added, “No SALT, no deal,” repeating a mantra both he and Gottheimer have said recently.
All three argued that the cap has harmed middle-class filers in their states, pointing to to the fact that the measure resulted in an increased federal tax burden for many homeowners.
"This is a middle-class problem, the taxes on middle-class families went up because of that bill, not down," Gottheimer said.
"The term 'middle class' is different, depending on where you live in the country," Suozzi said.
Pelosi has said in recent days that she is a “big supporter” of and was “sympathetic” to removing the caps and that “hopefully we can get it into the bill.” Schumer, meanwhile, sponsored a bill earlier this year that would restore the SALT deduction.
That could end up being more than enough to push Biden, who had expressed support for repealing the caps during the presidential primary, to undo them and align with the moderates.
Democrats have a narrow majority in the House and must keep their defections to a minimum in order to pass a bill, unless they get Republican support. In the Senate, a host of other issues, including a robust debate over raising corporate taxes, promise to further complicate the plan's future.
'Retribution politics' or tax the rich?
Prior to the bill being signed into law in 2017, filers could deduct all of their state and local taxes from their federal taxes.
For taxpayers in high-tax states such as New York, New Jersey, Connecticut and California, the SALT deduction offered potentially enormous federal tax relief, because filers could write off the large amount of state, local and property taxes they were paying.
Proponents of keeping SALT caps, including progressives, have pointed to the fact that their removal would disproportionately benefit the wealthy. According to a 2020 Brookings Institution analysis, 96 percent of the benefits of a SALT cap repeal would help the top fifth of all taxpayers, and nearly 60 percent of the benefits would help the top 1 percent. Twenty-five percent of the benefits of a SALT cap repeal would benefit the top 0.1 percent of taxpayers, the analysis found.
Lawmakers in high-tax blue states have claimed Trump and Republicans included the measure to punish them. (New York Gov. Andrew Cuomo has called the policy “retribution politics, plain and simple.”) Higher taxes in those states allow for more generous social services and more expansive state governments, which Democrats say Republicans were trying to curb by putting pressure on those states to cut their taxes.
“It’s impossible to deny that Republicans when they fashioned their tax bill, were quick to try to use wedge issues wherever possible,” Totten said.
Prior to the cap, the average SALT deduction in New Jersey had been upwards of $19,000, according to the Tax Policy Center. In California, it had been upwards of $20,000, and in New York it had been nearly $24,000. In Oklahoma, for example, it had been about $8,000, an amount unaffected by the cap.
What happens next?
The irony that Biden’s posture on a policy created by Trump could make or break an infrastructure package isn’t lost on strategists. Several said that regardless of that unusual intersection, Biden’s apparent support of keeping the SALT caps simply helps bolster the consistency he’s so far maintained in pitching progressive policies.
“It makes for some strange bedfellows,” Democratic strategist Joel Payne said.
Payne pointed out that, even though it was a Trump-era policy, SALT caps actually align with a progressive ”bottom-up approach” to the economy — one on which the Biden presidency has been consistent.
“The president is siding with the progressive position, which has been a consistent thread in all of his policy pronouncements so far, certainly with tax policy — that wealthy and the well-connected should pay more,” he said. “And that he could possibly dig in there represents a sea change in mainstream Democratic politics.”
In Payne's estimation, Biden “is going to negotiate on this.”
The president is scheduled to meet Monday with Democrats and Republicans in the House and the Senate to talk about his infrastructure plan.
What future talks look like — possibilities include giving moderate Democrats what they seek; raising the caps instead of lifting them altogether; or promising that addressing the caps will come in a different bill, possibly Biden’s promised second infrastructure bill — is just the latest example of how Biden will have to work to keep the Democratic Party’s delicate coalition together while also keeping promises to undo many of his predecessor’s policies.
Some progressives are signaling they’re willing to cede some ground.
“Fundamentally, SALT isn’t necessarily the top issue,” said Quint, of Tax March, whose group just last year had been strongly opposed to efforts to repeal the caps. “We need to be looking at larger issues like increasing the corporate tax rate, looking at a wealth tax. The SALT cap is not an area for us to get lost in or divided over.”