CHICAGO — As taxpayers face a May 17 tax filing deadline, Congress is negotiating the possible expansion or elimination of the $10,000 cap on state and local tax deductions — an issue of particular significance to residents of high tax states such as Illinois.
Removing the cap, part of President Donald Trump’s 2017 Tax Cuts and Jobs Act, is a politically fractious issue, even among Democrats, with some arguing it mainly favors the wealthy. President Joe Biden’s administration has delivered mixed signals on where it stands.
Previously, taxpayers had been able to deduct all of their local property taxes, and either state income or sales taxes, along with mortgage interest, medical expenses and charitable giving, from their taxable federal income if they itemized their deductions.
Legislation to abolish the cap was approved by the Democratic-controlled House in 2019 but was never considered in the then-GOP led Senate. Now Democrats have control of both chambers.
But with only a slim majority in the House, some Democratic lawmakers have threatened to withhold their votes for Biden’s $2 trillion infrastructure program unless the administration backs eliminating the cap. A White House spokeswoman has said Democrats need to figure out how to replace the revenue shortfall of doing that if they want to move forward.
SALT, the acronym for the state and local tax deduction, has been part of the federal tax code since its inception in 1913, and on a dollar basis had been one of the highest claimed deductions from federal tax filers.
In 2017, under a Republican president and Congress, the $10,000 cap was instituted among other sweeping tax changes that also basically doubled the individual standard deduction.
The increase in the standard deduction has sharply limited the tax advantage of itemizing deductions, as well as a taxpayer’s ability to do so. If the SALT cap was lifted, it is uncertain whether only those with higher incomes would be able to take advantage of the deduction or be able to itemize as an alternative.
One of the architects of the changes was then-U.S. Rep. Peter Roskam, an Illinois Republican who headed the tax policy committee of the powerful House Ways and Means Committee. A year later, Roskam was defeated by Democrat Sean Casten in a campaign where the SALT cap became a significant issue.
The imposition of the cap by Republicans, Casten said in an interview this month, “was done very surgically and it was done specifically to penalize, not Democratic districts, but districts where voters have made a conscious choice to invest extra tax dollars in better schools, better roads.”
Republicans argued the uncapped deduction represented a federal subsidy of local Democratic tax policies. Democrats contended their states already put far more money into Washington than they get back and that imposing the cap was double taxation.
Earlier this month, Democratic Gov. J.B. Pritzker joined with the Democratic governors of New York, New Jersey, California, Connecticut, Oregon and Hawaii in a letter asking Biden to “relieve this immense financial burden and eliminate the SALT cap entirely.” The governors noted residents were forced to pay billions of dollars in additional federal taxes as a result of the limitation.
“Like so many of President Trump’s efforts, capping SALT deductions was based on politics, not logic or good government,” the letter said.
“This assault disproportionately targeted Democratic-run states, increasing taxes on hardworking families. This was unacceptable then and is simply untenable given the dire economic conditions caused by the pandemic,” the governors said.
In March, Treasury Secretary Janet Yellen vowed to work with Congress to ease the cap, saying the limitation on the state and local tax deduction caused “disparate treatment” among taxpayers.
But the revenue loss from eliminating the cap remains an issue for the Biden administration. The estimated cost in federal revenues of the full SALT deduction in the 2017 federal budget year was $100.9 billion, a figure that dropped to $21.2 billion after the cap and higher standard deduction was put in place.
“If Democrats want to propose a way to eliminate SALT — which is not a revenue raiser, as you know, it would cost more money — and they want to propose a way to pay for it and they want to put that forward, we’re happy to hear their ideas,” White House press secretary Jen Psaki said this month.
Critics say high property taxes in Illinois, particularly in suburban districts where they are largely devoted to funding local public schools, have led to people moving out of the state. That makes the deductions cap especially relevant.
A study by the Tax Policy Center of the Urban Institute and the Brookings Institution, using 2016 federal tax data, found that 48.7% of tax filers in Casten’s west and north suburban 6th District claimed the SALT deduction as did 47.3% of filers in Democratic Rep. Lauren Underwood’s west and northwest suburban and exurban 14th District.
In Democratic Rep. Brad Schneider’s North Shore 10th District, 41.4% of filers claimed the deduction, and in Democratic Rep. Bill Foster’s west and southwest suburban 11th District almost 40% of filers did the same.
The average amount of the SALT deduction claimed in Schneider’s district was $18,874; in Casten’s district $15,815; in Underwood’s district $12,610; and Foster’s district $11,310, the study showed.
While fewer filers claimed the deduction in Illinois’ other 14 congressional districts, the average deduction claimed was significant in three of them: Democratic Rep. Danny Davis’s sprawling city and west suburban 7th District at $16,989; Democratic Rep. Jan Schakowsky’s North Side and north and northwest suburban 9th District at $16,605; and Democratic Rep. Mike Quigley’s North Side and west suburban 5th District at $15,018.
In half of the state’s congressional districts, the average SALT deduction claimed in 2016 exceeded the $10,000 cap, the study showed.
Pending House legislation to eliminate the cap completely has 106 co-sponsors, including 96 Democrats and 10 Republicans. Eight Democrats from Illinois, Schneider, Davis, Casten, Quigley, Underwood, Foster and Raja Krishnamoorthi and Bobby Rush, have signed on as co-sponsors.
Casten and Underwood also introduced separate legislation that would increase the $10,000 SALT cap to $15,000 for individual filers and allow people married and filing jointly to double their deduction up to $30,000.
“We want to make sure that people in the communities like the one I live in are not double-taxed and aren’t forced to move out of these communities because they can’t afford to live there anymore,” Casten, of Downers Grove, said.
Economic studies from conservative and liberal groups acknowledge that the SALT deduction largely benefits higher income taxpayers, particularly the wealthy who pay a higher tax rate, making the write-off of even greater value.
The Tax Policy Center study found only 16% of tax filers with income between $20,000 and $50,000 claimed the SALT deduction in 2017, compared to 76% of tax filers with income between $100,000 and $200,000 and over 90% with income above $200,000. Though, tax filers earning above $100,000 were 18% of all tax filers, they accounted for about 78% of the total dollar amount of SALT deductions reported, the study found.
Supporters of expanding or repealing the SALT cap argue that in high tax states, correlating income is also higher and that the deduction is a benefit not just to the wealthy but also to the middle class.
But even if the cap is changed or removed, the expanded standard deduction and the limited ability to itemize deductions as an alternative raises questions about how many tax filers could take advantage of a higher SALT deduction.
Before the tax reform law, about two-thirds of all taxpayers claimed the standard deduction. That jumped to almost 90% for the 2018 tax year, the first year of the higher standard deduction and the cap on SALT.
For this year’s taxes, personal finance firm Kiplinger said the standard deduction is $12,400 for a single person or $24,800 for joint filers. That means to gain any benefit from itemizing, the amount of state and local taxes, certain health care expenses, charitable contributions and mortgage interest paid would have to exceed those amounts.
The residential home industry, which is backing changes to SALT, considers it, along with the mortgage interest deduction, an element of government’s longtime efforts to encourage homeownership. But even the industry concedes that low mortgage and mortgage refinancing rates have reduced the enticement of the interest deduction.
Illinois Republican Chairman Don Tracy contended Pritzker’s support for changing the SALT cap was a self-serving move by a billionaire governor looking to reduce his federal taxes amid his “history of trying to avoid taxes.”
But the state GOP’s position could put it at odds with residents of old-line suburban communities that until recent elections have shown a history of backing Republicans. That could be particularly true in areas of DuPage, Lake and Kane counties with large homes and the property tax bills that go with them.
The issue hasn’t gone unnoticed in Springfield, though there is little the state legislature can do about a federal tax issue. But the SALT cap imposed by congressional Republicans left open a loophole for some businesses.
Legislation passed by the state Senate on a 56-0 vote would allow a wide range of small businesses whose owners typically pass through their income to their individual taxes to file as an entity. That would allow them to take advantage of IRS rules that SALT tax payments associated with pass-through business income are not subject to the $10,000 limit.