Bills
| 3.23.22

Should an IRS Rule Restricting States’ Workarounds to the SALT Tax Cap be Repealed? (S. Joint Res. 50)

Do you support or oppose this bill?

What is S. Joint Res. 50?

(Updated October 20, 2020)

This joint resolution would repeal the Internal Revenue Service’s (IRS) rule capping a workaround that helps taxpayers reduce their tax obligations through state-authorized tax credits. Without this IRS rule, taxpayers would be able to use state tax credit programs to make up to $1,000 contributions to charities that are eligible for 70% ($700) in state tax credits. With this IRS rule in place, they would only be able to deduct the net amount of $300 from federal taxes.

This rule was published on June 13, 2019. Congress has the authority to overturn rules within 60 legislative days with simple majority votes in both chambers along with the president’s signature under the Congressional Review Act, and if this resolution were enacted the IRS would be prohibited from issuing a similar rule without congressional approval.

Argument in favor

The state and local tax (SALT) deduction is an important source of tax relief for residents of high-tax states, such as New Jersey. The SALT deduction cap hurts the middle class in high-tax states, and should be restored to ensure that families living in high-tax states aren’t punished for where they live.

Argument opposed

The SALT deduction primarily benefits those who are upper middle class or better and isn’t a major factor for most middle class families, most of whom don’t itemize their tax returns (and therefore can’t claim the SALT deduction). Allowing workarounds to the SALT cap benefits the rich at the expense of the poor.

Impact

Taxpayers who previously claimed over $10,000 in SALT deductions; top individual income earners; and the IRS.

Cost of S. Joint Res. 50

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sen. Chuck Schumer (D-NY), who calls the 2017 tax reform bill that capped the SALT deduction “a mean and nasty move to help the wealthiest people,” introduced this resolution to restore the SALT tax deduction: 

“While none of us have a magic wand to wave and undo the nasty tax predicament the federal government has cast on Long Island, there is one more veritable rabbit in the hat Congress can use to make this unfair IRS rule disappear, and I am announcing today, that I’m going to use it. The special legislative power comes from the Congressional Review Act (CRA) and tomorrow I will drop what is called a ‘Resolution of Disapproval’ to overturn the recent IRS decision that blocks New York State from implementing its workaround plan to allow Long Islanders to claim their rightful SALT deduction. New York State had a smart plan, and the IRS shot it down, but not all is lost. Taking away the SALT deduction was brutally unfair to Long Island homeowners and hit ‘em right between the eyes, and now the IRS has added insult to injury, and that’s why we have to keep fighting.”

Sen. Schumer points out that Americans living in suburban neighborhoods in high-tax states such as New York and California are already paying some of the highest property and school taxes in the U.S. With this in mind, he says that “for the federal government to then penalize them is so unfair." He claims that “[t]he devastation in New York is very, very bad” and that the SALT cap is affecting "many Republican states."

Homeowners associations and town supervisors in Sen. Schumer’s home district of Long Island support this resolution. North Hempstead Town Supervisor Judi Bosworth says: 

“The elimination of SALT deductions is a slap in the face and a punch in the gut that will have devastating impacts on the local housing market, which will then trickle down into every facet of our local economy. That’s why this work around is critical for the survival of Long Island’s middle class, which sorely depends on this exemption to makes ends meet. Long Islanders already give far more to Washington than we get back, so paying anything more than our fair share is not an option.”

Senate Finance Committee Chairman Chuck Grassley (R-IA) has made his opposition to raising the SALT cap clear. After President Trump made comments on being “open to talking” about this issue earlier this year, Sen. Grassley’s spokesman, Michael Zona, said, “The Senate Finance Committee won’t be revisiting the SALT deduction reforms made in the Tax Cuts and Jobs Act under Chairman Grassley’s leadership.” Zona added: 

“It’s ironic that the same Democrats who criticized the Tax Cuts and Jobs Act for supposedly benefiting only the wealthy are now advocating for a change to the law that would primarily benefit the wealthy.” 

Finally, Zona argued that instead of raising the SALT deduction at the federal level, states should instead lower their own taxes.

Rep. Kevin Brady (R-TX), the top Republican on the House Ways and Means Committee and a key author of the TCJA, says he believes high-tax states “want a green light to tax their local citizens unmercifully.” He argues that their desire to see the SALT tax restored reflects their “hope that someone else will pay" for high state and local taxes.

The Trump administration expressed its opposition to this resolution in an October 23, 2019 statement of administration policy. It argued that it would undo the TCJA's success: 

"Congress and the Administration enacted historic tax reform through the adoption of the Tax Cuts and Jobs Act of 2017, which cut taxes for the middle class and reignited America’s economy. Instead of adding to this success, this joint resolution would upend longstanding principles of tax law and create confusion among taxpayers and preparers. Not only would it allow States to create workarounds of a key provision of the Tax Cuts and Jobs Act and create a loophole for special interests, but it would also primarily benefit high-income taxpayers."

This resolution failed to pass the Senate by a 43-52 vote with the support of 12 Democratic cosponsors. Its House companion, sponsored by Rep. Mikie Sherrill (D-NJ), has 53 bipartisan House cosponsors, including 52 Democrats and one Republican. 

Prior to the vote, observers noted that this resolution's odds of passage in the Senate were doubtful, as the vast majority of GOP senators represent Southern, Midwestern, and Western states that indirectly benefit from the SALT cap.


Of Note: The Tax Cuts and Jobs Act capped the state and local tax deduction at $10,000 for individuals and $5,000 for married couples filing separately, in part because the standard deduction was doubled to $12,000 for individuals and $24,000 married couples with joint returns — meaning fewer taxpayers would need to itemize and claim the deduction. 

Prior to the TCJA’s enactment, taxpayers who itemized their return could deduct their state and local property and income taxes or general sales taxes without limitation. Consequently, state and local income and real estate taxes made up approximately 60% of local and state tax deductions, while sales and personal property taxes made up the remaining 40%. According to the Tax Policy Center, approximately one-third of tax filers itemized deductions on their federal income tax returns. In 2014, the IRS reported that approximately 1.9 million New Yorkers filed for the mortgage interest deduction each year.

In response to the TCJA, New York Governor Andrew Cuomo proposed a new system in which New Yorkers could use specially created state and local funds set up like charities to help pay their state and local taxes while maintaining the full deductibility of charitable contributions through tax credits. However, this plan was rejected by the IRS in early June, when it created rules that would drastically reduce the benefit of using Cuomo’s workaround. 

Under Cuomo’s program, a taxpayer would have been able to donate $1,000 to a special state fund and receive a 70% credit against their state and local tax bill. By contrast, the final IRS rule (which this resolution would repeal) says taxpayers can only claim a $300 tax deduction.

In response to the IRS rule, Governor Cuomo accused the Trump administration of targeting Democratic-dominated states such as New York: 

“The federal government is continuing its politically motivated economic assault on New York. We will pursue all options, including litigation, to resist this attack on our state and our taxpayers.”

In July 2019, New York, New Jersey, and Connecticut announced a lawsuit challenging the IRS’ rule. Calling the final rule “contrary to law and arbitrary and capricious”, the states argued that the rule violates the Administrative Procedure Act because it’s inconsistent with the section of the federal tax code about deductions for charitable contributions. They also added that the rule violates the Regulatory Flexibility Act because the IRS didn't publish a regulatory flexibility analysis. Therefore, they asked a judge to set aside the rules.

In a statement, Gov. Cuomo argued that “the IRS's final rule… undermines states' efforts to protect our taxpayers against the unprecedented, unlawful and politically motivated capping of the SALT deduction."

The state and local tax deduction can only be claimed by taxpayers who itemize their returns, so it generally benefits higher earning taxpayers. According to data from our partners at USAFacts, a non-partisan civic data initiative, the average tax savings from claiming the deduction per return in 2015 for taxpayers making less than $61,000 was $144; whereas taxpayers making more than $113,000 saved $1,569 on average and the top 1% of taxpayers saved an average of $21,723. In 2017, data from USAFacts put the total amount of taxes deducted using SALT at $104.1 billion.

Four states, including New York and Maryland, have filed a lawsuit to have the SALT cap declared unconstitutional. However, the lawsuit was recently dismissed by the judge. Sen. Schumer’s office and the New York Attorney General have indicated that they might appeal the decision.

Earlier this year, the office of Rep. Bill Pascrell (D-NJ) — who introduced legislation to restore the SALT deduction — disputed the assertion that the SALT deduction largely benefits the wealthy, saying that it in fact benefits middle-class families earning under $200,000: 

“The SALT deduction allows taxpayers to write off taxes paid at the state and local level from their federal income tax bill so they won’t be subject to being taxed twice on the same dollar.  In addition to helping families avoid double taxation, the SALT deduction supports the ability of communities, cities, and states to raise their own revenues and fund critical investments in public education, infrastructure, social services, and public safety.”

To back up its assertion, Rep. Pascrell’s office cited a survey of over 300 New Jersey-based CPAs by the New Jersey Society of Certified Public Accountants (NJCPA), in which over 63% of respondents said their individual and family clients earning less than $200,000 would see their federal tax bill rise as a result of the SALT cap.

However, the Urban-Brookings Tax Policy Center estimates that the top one percent of taxpayers would reap around 56% of the benefits if the SALT cap were to be repealed.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / designer491)