SALT cap reform inches forward

New York Republican Rep. Mike Lawler last week introduced a bill to significantly expand the state and local tax deduction cap in a fresh effort to resolve a thorny issue that President-elect Donald Trump appears to support.

The legislation would raise the current $10,000 deduction cap to $100,000 for single filers and $200,000 for married couples filing jointly. A similar bill failed last year, but Trump’s support would likely ease the effort this time around.

The incoming president met Sunday with Republican lawmakers from New York, New Jersey and California and reportedly urged them to find a number that works for them and would win support from Republicans who support the current limit.

Long a thorn in the side for both Democratic and Republican lawmakers from high-tax states, the federal deduction on state and local taxes was capped at $10,000 as part of the 2017 Tax Cuts and Jobs Act. It’s set to expire at the end of the year without any action.

Municipal issuers have said the cap infringes on their own ability to levy future taxes, and the Government Finance Officers Association calls the deduction “fundamental to the way states and localities budget for and provide critical public services, and a cornerstone of the U.S. system of fiscal federalism.”

From the buyside perspective, the cap is seen as increasing demand for tax-exempt municipal bonds.

Republican supporters say it’s a key revenue-raiser in a time when Congress is on the hunt for pay-fors to offset the cost of extending the TCJA.

SALT reform marks one of several complicated issues that could hamper the GOP’s ambitious tax reform timeline. Their razor-thin majority means Republicans can’t afford to lose support for legislation, and lawmakers like Lawler have said they won’t approve a reconciliation bill that fails to lift the cap. House Ways and Means Chairman Jason Smith, R-Mo., however, said last week he believes SALT reform would be the “easiest” issue to solve, according to Punchbowl News.

Any lifting of the cap would be targeted at middle-class taxpayers, not the “ultra wealthy,” New York Republican Rep. Nicole Malliotakis said Tuesday on Fox News.

“The president does support our efforts to raise that deduction,” Malliotakis said, adding that it’s needed because “mayors and governors” overtax residents in places like New York. “What we’re really trying to do is find that balance where we can provide that relief for our middle-class residents who are truly struggling.”

Separately, House Republican leaders Monday floated a proposal that would tie California wildfire aid to a bipartisan agreement on raising the debt ceiling, which has posed another potential sticking point for the reconciliation bill.

“It’s one of the ideas out there,” House Speaker Mike Johnson, R-La., said Tuesday at the House Republican leadership press conference. “It is not political,” Johnson added. “We need to do the right thing for the people at a time when our fiscal house needs to be made back in order.”

Johnson also reiterated his “aggressive pace” for a reconciliation bill. The House hopes to release a budget by the end of February with a reconciliation bill voted on the House floor before Easter and “have the entire thing done and to the president for his signature by Memorial Day.”