WASHINGTON — President Donald Trump’s major tax package could be in trouble as a small yet persistent faction of House Republicans threatens to tank the entire framework unless certain demands are met.
One of the most complicated matters still being hashed out is how much to expand federal deductions for state and local taxes paid, also known as SALT.
The issue is more critical for taxpayers in blue states where state and local taxes are higher, so blue-state Republicans have taken a stand — even going so far as to threaten final passage if a higher deductible is not included.
House Republicans have advanced almost every portion of the party’s reconciliation bill combining Trump’s policies on taxes, energy, border and national defense. However, some sticking points remain about what to do with SALT as blue-state Republicans demand a larger expansion of the tax deductions that particularly impact their states.
What is SALT and why is it politically charged?
SALT is a provision in the U.S. federal income tax system for taxpayers who itemize their deductions to help reduce their federal taxes.
It allows taxpayers to deduct their state and local taxes from their federal taxable income. The deduction itself has been in place for over a century, but has seen various limitations over the last few decades.
Taxpayers used to be able to deduct the full amount of their state and local taxes, which particularly benefited those from high-tax states such as California, New York and New Jersey. But that changed in 2017 under Trump’s Tax Cuts and Jobs Act, which capped deductions at $10,000.
High income taxpayers are more likely to itemize, and are also more likely to pay high state income taxes and property taxes, so the cap on the deduction had the effect of making the tax system more progressive.
But blue-state Republicans argue higher taxes in their states meant the deduction limit hit even middle-income families.
The deduction limit is set to expire at the end of this year, which would return SALT to a deduction-free tax policy. As a result, Republicans from these high-tax states are using it as leverage to increase the deduction maximum to benefit their constituents — and are unafraid to tank the full package if those expansions are not included.
“The bill expires at the end of the year, SALT goes back to unlimited. Time is my friend,” Rep. Nick LaLota, R-N.Y., said on Thursday. “We can go as long at this as we need to.”
GOP leaders seek a deal with SALT caucus as deadline looms
During a closed-door meeting on Monday, Republican leaders offered to increase the current deduction cap to $30,000 — a 30% increase from current limits — and incorporate a new $400,000 income limit. Those parameters were advanced in the tax measure on Wednesday despite pushback from New York Republicans who do not sit on the committee.
Now, those Republicans are threatening to vote against the full package when it comes to the floor unless the deduction cap is higher.
“As this stands right now, I am a no,” Rep. Mike Lawler, R-N.Y., said on Wednesday. “They’re going to need to come up with a solution here — and quickly, if they want to stay on the schedule that they’ve outlined.”
“We’re not voting for a cap that we can’t sell back home. That’s the reality,” LaLota said.
House Republican leaders have established Memorial Day as their self-imposed deadline to get the reconciliation bill passed and on to the Senate, hoping to finish the monthslong process before lawmakers leave for holiday recess.
House Speaker Mike Johnson, R-La., and other GOP leaders have met with SALT caucus members several times behind closed doors throughout the week to negotiate a higher number, with those talks expected to last through the weekend.
“Not everybody’s going to be delighted with every provision in a bill that’s large, but everyone can be satisfied,” Johnson said in between talks on Thursday. “I’m convinced that we’ll be able to adjust the dial, so to speak, so that we can come to an agreement that will meet the criteria that everybody has, and that we can move this thing forward.”
A fight years in the making
The standoff over SALT has been quietly brewing over the last few years, now bursting into the mainstream as a make-or-break factor for Trump’s agenda.
New York Republicans made SALT a major issue in the last Congress, pressing House GOP leadership for legislation to increase the deduction cap. Those votes all failed on the floor — but now, the SALT Republicans have real leverage over a must-pass package for Trump’s agenda.
“It’s a flash point because those who have always known the political potency and economic value haven’t bent. They know they have the leverage and are using it,” former Rep. Marc Molinaro, R-N.Y., who mediated discussions over the last two years while in office, told the Deseret News. “Candidly, they are doing what is necessary.”
Molinaro, as well as former Rep. Anthony D’Esposito, R-N.Y., have been engaged in talks with their SALT colleagues as they cheer on their New York delegation from afar.
“SALT became a flashpoint because people finally realized it’s not some wonky tax issue — it’s a direct hit on middle-class families,” D’Esposito told the Deseret News.
Those who support the SALT deduction argue the cap is necessary to ensure that higher-income taxpayers don’t receive larger deductions than middle- and low-income taxpayers. However, blue-state Republicans as well as their Democratic counterparts argue the deduction cap unfairly taxes residents in areas where housing costs and property taxes are already expensive.
“Blue states are getting crushed for the ‘crime’ of living here. The solution by others to ‘fix your state.’ … We are trying but even with a stellar (governor) candidate, it’s hard to overcome the five boroughs,” D’Esposito said.
“They need the SALT votes” for reconciliation, he added. “This shouldn’t have waited until now. Trump knows and wants this done.”