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May 29, 2020

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Federal cap on state, local tax deductions not going away

Senate stands in way of House bill that would change 2017 law

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WASHINGTON — Live in an area with a Democratic congressperson? Then it’s likely you were hurt more than people who live in Republican districts by the cap on deductions for state and local taxes.

And there’s little hope any relief is coming until at least 2022.

The Democratic-run House last month passed legislation to eventually do away with the $10,000 per return limit on state and local tax deductions (SALT).

But asked if he would consider the ideas in the House bill, Sen. Charles Grassley, an Iowa Republican who heads the tax-writing Senate Finance Committee, said flatly, “No.”

“The economic answer is this tax bill has been so good for the economy that we should not be bringing uncertainty about the tax bill by even talking about it,” he told reporters last week.

The 15 most affected congressional districts, and 78 of the top 100, have Democratic congresspeople, according to an analysis by the Tax Policy Center.

Critics charge all this was by design, as Republicans were eager to help people in places friendly to them.

“The states affected are generally blue. They were singled out,” said Frank Sammartino, Tax Policy Center senior fellow.

Democratic states hit hardest

A study by the Federal Reserve Bank of Atlanta earlier this year found that the 10 places gaining the least from the income tax cuts are all Democratic-leaning. California topped the list, which also included Vermont, Oregon, Washington, D.C., Hawaii, New York, Massachusetts, Minnesota, New Jersey and Maine.

Republicans wrote the 2017 tax bill that put limits on the deduction, and got no Democratic support. GOP lawmakers argued that capping the deduction would be offset by other tax breaks, notably a reduction in rates.

Grassley said Wednesday that while the bill did not target Democratic states, it did address higher-tax states.

“From a political standpoint, our goal was to make sure that the national taxpayers weren’t subsidizing the big spending in a lot of mostly liberal states,” he said.

Without naming such states, he called them “big population states where they don’t care a whole lot about what they spend or what they tax the higher-income people.”

Putting limits on state and local tax deductions is a way of limiting state and local taxation because it helps “ensure federal tax policy doesn’t reward states and cities for raising their taxes sky high,” said Rep. Adrian Smith, R-Neb., a member of the tax-writing House Ways and Means Committee.

Data shows that most people generally are paying less federal income tax because of the 2017 legislation. But in many places where the bigger state and local deduction was unavailable, the tax cut was often less than in other congressional districts.

California’s 33rd District, which covers parts of the Los Angeles area, was among the hardest hit by the change. The average SALT deduction in the district, represented by Rep. Ted Lieu, a Democrat, was $46,901 in 2016, the Tax Policy Center estimated. About 53 percent of tax returns included a SALT deduction.

Those with adjusted gross incomes of $75,000 to $100,000 averaged a tax cut of 1.9 percent of after-tax income under the law, according to the nonpartisan Tax Foundation. Those earning more than $200,000 averaged a 3.3 percent cut.

In contrast was Kansas’ 2nd District, represented by Rep. Steve Watkins, a Republican. Those earning $75,000 to $100,000 averaged a 2.3 percent tax cut, and the wealthiest taxpayers saw a cut of 5.59 percent. About 22 percent of the district’s returns included the SALT deduction, which averaged $8,080.

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