WASHINGTON — Senate Democrats are at an impasse on how to address the current $10,000 cap on deducting state and local taxes, leaving a meeting Tuesday without consensus on how to handle the issue in their $2.2 trillion budget reconciliation bill.
“SALT” deduction proponent Sen. Bob Menendez, D-N.J., and critic Sen. Bernie Sanders, I-Vt., have been working on a plan to extend the cap past its 2025 expiration and add an income-based exemption. But their efforts hit a snag this week over disagreement on the income level at which limits should begin, and over whether it should generate revenue to fund other priorities in the social safety net and climate package.
Menendez and Sanders held a press conference weeks ago to announce they’d be working on an income-based SALT cap as an alternative to the plan that passed the House, which would raise the cap to $80,000 beginning retroactively in the 2021 tax year and extend it until it returned to $10,000 in 2031. That would generate nearly $15 billion in revenue, in comparison to earlier proposals that would have added to the bill’s cost after pressure to trim the package from Senate centrists.
Menendez said Monday the Joint Committee on Taxation found that an income-based exemption that began phasing out at $550,000 of earnings for an individual and “a little less than double” that for married couples filing jointly would be revenue neutral. He’d previously called for a threshold around $550,000, saying it would cover nearly all New Jersey taxpayers.
Sanders told reporters he wanted the phaseout to begin at $400,000 of income, which he said Monday would raise a couple hundred billion dollars he hoped would pay for expanding Medicare benefits.
The two senators met in Senate Majority Leader Charles E. Schumer’s office Tuesday afternoon with fellow Senate Democrats including Michael Bennet of Colorado, Jon Tester of Montana, Elizabeth Warren of Massachusetts, Jeff Merkley of Oregon, Jon Ossoff of Georgia and Maine independent Angus King, most of whom have said they prefer the income-based plan to the $80,000 cap now in the bill. King told Insider this week that he backs Sanders’ concept.
Lawmakers leaving the meeting described it as productive, but bringing no final agreement on the issue.
“It was a good discussion,” Sanders said. “I think we’re making some progress.”
A Menendez spokesman called the meeting “a positive step” but said a revenue-generating approach would lose support from his boss.
Tester, who’s been critical of changes to the SALT cap for benefiting people earning over $400,000 per year, said after the meeting that senators discussed multiple options on SALT and that a lower deduction limit is a possibility, but some form of changes to the current bill are likely.
Senators from high-tax states like New York, New Jersey and California generally favor bigger exemptions from the SALT cap, arguing it unfairly targets their states and makes it more difficult to fund progressive policies at the local level.
But others including Sanders, Bennet and Tester have been critical of some options for benefiting the wealthy. On the House side, Rep. Jared Golden of Maine’s 2nd District, was the only Democratic member to oppose that chamber’s version of the bill last month, citing the SALT plan.
“I sure didn’t come to Congress to cut taxes for rich people,” he tweeted on Wednesday.
Outside experts largely prefer the income-based exemption to lifting the cap, saying the latter would give a bigger benefit to the rich but that any change to the SALT cap would be regressive.
Another stumbling block to SALT plans could come from Sen. Joe Manchin, D-West Virginia, who has suggested Democrats slow down their work to pass the reconciliation bill as a whole, which could make it more difficult to begin any changes to the cap in the 2021 tax year. Schumer has set a Christmas deadline for passing the filibuster-proof package.
But he needs the backing of Manchin, who told reporters Monday he still favors the “strategic pause” he called for months ago given uncertainty about inflation and COVID-19, especially given the new omicron variant. If the Senate holds off on passing the reconciliation bill until 2022, that would complicate the retroactive relief.
“As long as they do it before filing season, which starts really in February, it shouldn’t really matter much to taxpayers,” said Howard Gleckman, a senior fellow at the Tax Policy Center. “Now what it will do is be a nightmare for the IRS.”
Story by Laura Weiss of CQ-Roll Call. David Lerman and BDN writer Michael Shepherd contributed to this report.