SALT change likely to be cut from bill, say Senate Democrats

Senate Democrats say a proposal to raise the cap on state and local tax (SALT) deductions, a top priority of Senate Majority Leader Charles Schumer (D-N.Y.), is likely to be cut from the revised Build Back Better Act.

Senate Democrats who were involved in negotiations over the bill before Sen. Joe Manchin (D-W.Va.) blew it up last month say there's simply not enough room for the expensive tax change, which Republicans argue would benefit wealthy suburban households in blue states.

"Yeah, I think that's dead," said one Democratic senator, who requested anonymity to summarize early discussions about changing the bill to win Manchin's support.

A second Democratic senator familiar with negotiations on the tax provisions of the legislation said Manchin has signaled to colleagues that he's not a fan of changing the tax break.

"He doesn't like the SALT" fix, said the second lawmaker.

It's a blow for Schumer, who is up for reelection this year and pledged in 2020 to make repeal of the cap on SALT deductions a top priority if Democrats won control of the Senate.

"If I become majority leader, one of the first things I will do is we will eliminate it forever," he said at a press conference in Long Island in July of 2020.

Pulling the SALT fix out of the legislation also will make it tougher to pass the legislation through the House, where last week three Democrats from New York and New Jersey insisted they won't support any bill that doesn't raise the $10,000 cap former President Trump imposed on SALT deductions in 2017.

"SALT remains a top priority. We support the President's agenda, and if there are any efforts that include a change in the tax code, then a SALT fix must be part of it. No SALT, no deal," said Reps. Josh Gottheimer (D-N.J.), Tom Suozzi (D-N.Y.) and Mikie Sherrill (D-N.J.) in a joint statement.

But opponents of lifting the SALT cap were quick to note that the number of House Democrats threatening to tank the bill over the issue is dwindling as the realization sinks in that their party may not be able to pass any version of Build Back Better.

Critics grumble that raising the cap on SALT deductions runs counter to what they say is the main political rationale for passing the legislation: addressing wealth inequality.

Senate Budget Committee Chairman Bernie Sanders (I-Vt.) has been the most outspoken critic of the idea in the Senate Democratic Caucus. But many other Senate Democrats aren't enthusiastic.

Sen. Martin Heinrich (D-N.M.) said he wouldn't be heartbroken if the SALT fix dropped out of the bill.

Asked if it's on the chopping block, Heinrich said: "I hope so."

"I'm not a fan of SALT," he said, adding that at the very least the deduction should be means-tested so it doesn't cut taxes for the wealthiest individuals and families.

Democratic senators say that passing a SALT fix becomes a much heavier political lift in a smaller budget reconciliation package, especially if it crowds out other priorities.

"The smaller the bill gets, the harder it is to squeeze something in," said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. "If they do put something in with SALT, it's likely to be much smaller than what they were talking about before."

Another problem is that Senate Democrats can't agree how to structure the change and at what income threshold individuals and families should no longer be able to claim deductions.

Some proponents now suggest it might be better to simply wait for it to expire after 2025 instead of accepting a compromise that would extend some version of it for another 10 years and leave many of their constituents dissatisfied.

"Under current law, [the cap] expires soon," said Sen. Ben Cardin (D-Md.), a strong proponent of repealing the SALT cap. "That relief is coming, and some of the proposals I see eliminate that date."

Some Democratic senators are warning there's no way they'll accept SALT relief in lieu of the more popular enhanced child tax credit, which expired last month.

"The problem that the Democrats have here is not only does SALT relief cost a lot of money, but it is extremely regressive," Gleckman said. "We looked at a number of versions of this. We looked at an $80,000 cap, we looked at a $25,000 cap, we looked at a $400,000 phaseout ... and there are real significant differences, but all of them are extremely distributionally regressive. All of them largely benefit the highest-income people, no matter how you do it."

Middle-income individuals and families hardly see any benefit because the vast majority of them do not itemize deductions.

Manchin has declined to say publicly how he feels about Schumer's push to change the SALT cap, which would be a major benefit for New York, where top income earners pay state tax rates of between 9.65 percent and 10.9 percent.

Asked by The Hill last month what he thought about a proposal to raise the SALT cap, Manchin only chuckled and punted the question over to his colleague, asking Sen. Mark Warner (D-Va.), an outspoken critic of the idea, what he thought of it.

Warner acknowledged that allowing wealthy individuals and families to deduct more of their state and local taxes would be popular in areas of his state but said he worried about the fiscal impact.

"Even though my state would be a beneficiary of a more generous SALT provision, since we're not able to - unfortunately - roll back the Trump tax cuts, it would be a little ironic to give folks in the $700,000 to $800,000 range a tax cut in this bill," he said.

Manchin announced last month that he couldn't vote for the version of the Build Back Better Act then under discussions because it crammed in too many spending priorities and set unrealistically quick expiration dates for likely popular programs - such as the enhanced child tax credit - to keep the 10-year cost estimate of the proposal below $2 trillion.

Democratic policy experts now think the Build Back Better Act could get shrunk down to $1.5 trillion to satisfy Manchin's fiscal concerns.