Missing SALT tax break complicates path for Manchin and Schumer’s tax and climate change deal

A handful of House and Senate Democrats is on the fence about President Biden’s tax hike and climate change legislation because it does not restore a federal income tax break that primarily benefits blue states.

The lawmakers, mainly from the Northeast states, say they are disappointed that the bill does not heed their calls to restore the State and Local Tax — SALT — deduction. In the 50-50 split Senate, in particular, Democrats say the exclusion can be costly since the legislation is slated to pass via a party-line process known as budget reconciliation.

“Anybody can be Joe Manchin,” said New Jersey Sen. Bob Menendez, referencing his West Virginia colleague who delayed the reconciliation process for months until his demands were met. “I can be Joe Manchin right now.” 

Menendez was quick to note, however, that he would look at the “totality of the bill” before making a final decision. The sentiment was echoed by several House Democrats as well.

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“I’ve got to understand the impact it has on families in my district,” Rep. Josh Gottheimer, D-N.J., told reporters. Until I see specifics, it’s hard to know.” 

SALT could prove to be a major dividing point given that Democrats hold narrow control of Congress. With the Senate split evenly between both parties, Democrats cannot afford any defections there on the spending bill.

Likewise in the House, Democrats only have a four-seat cushion to pass legislation. One House Democrat, Rep. Jared Golden of Maine, is already seen as a likely no vote given his opposition to SALT in the past.

The lucrative deduction allows individuals to write off a certain portion of the taxes they pay to state and local governments on their federal returns. It once provided significant tax relief in states like New York and California, where the local tax burden is heavy. 

Former President Donald Trump’s 2017 tax bill capped the deduction to $10,000 per year. It also changed the eligibility criteria, allowing filers to deduct property taxes and state income or sales taxes but not both.

Critics argue that it delivers a benefit to only one section of the country.

“Our tax code should not favor red-state or blue-state elites with loopholes like SALT,” said Manchin.

Proponents disagree, however. They say states like New York and New Jersey pay significantly more in taxes to the federal government than they get back via grants and programs.

“More than 50% of families in [my district] took the SALT deduction before it was capped in 2017,” said Rep. Mikie Sherrill, D-N.J., recently. “Let’s keep our promises to them and families across the country who have been unfairly doubled taxed since then.”

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Despite the rhetoric, both the nonpartisan Tax Foundation and the liberal-leaning Brookings Institution say the SALT deduction largely benefits the wealthy.

“Households making $1 million or more a year would receive half the benefit of repealing the $10,000 federal cap on the state and local tax (SALT) deduction,” a study by the Urban-Brookings Tax Policy Center found. “Seventy percent of the benefit would go to those making $500,000 or more.”

The study further found that 96% of middle-income households would get no tax reduction at all by restoring SALT.

On the other hand, nearly 93% of households making more than a million dollars annually would receive a tax cut averaging $48,000.