Schumer, Gillibrand launch effort to restore SALT deduction

For decades, Americans could deduct all their state and local taxes on their federal returns, but the 2017 Republican-led tax overhaul capped that deduction at $10,000. The move dramatically boosted taxes on higher-income taxpayers in high-tax states such as New York, which is why practically every major New York politician has been clamoring for the restoration of the full deduction.

The legislation that the two senators, both New York Democrats, introduced would simply eliminate the cap on the so-called "SALT" deduction. The bill is unlikely to pass on its own, but it could be included in major tax and spending legislation that the new Democratic Senate majority introduces in the coming months.

“When it comes to SALT, New York families needed and deserved this money before the coronavirus took hold; the stakes are even higher now because the cap is costing this community tens-of-thousands of dollars they could be using amid the crisis,” Schumer said. “Double-taxing hardworking homeowners is plainly unfair. We need to bring our federal dollars back home to cushion the blow this virus – and this harmful SALT cap – has dealt so many homeowners and families locally.”

Gillibrand agreed.

“I am proud to join my colleagues to introduce legislation to repeal the cap on the state and local tax deduction, a cynical policy passed by Republicans as a way to repay wealthy donors and lobbyists with big corporate tax cuts,” Gillibrand said. “The reinstating of the SALT deduction will ensure that New York families have more money in their pockets, get much-needed tax relief and will once again be treated fairly.”

The senators argue that limiting the deduction is particularly unfair to New York because the state already pays more than $36 billion more in federal taxes each year than it receives back from the federal government.

Red-state Republicans, though, have long regarded the SALT deduction as a gift to the wealthiest residents of Democratic states, meaning they are likely to once again oppose efforts to restore the full deduction.

The politics of fully restoring the deduction are murky at this point. House passage is considered likely, given that the Democratic House passed a similar measure in the last Congress, only to see it die at the hands of the then-Republican Senate.

Given the level of Republican opposition, Democratic senators would likely have to try to pass the measure via a process called reconciliation, a rarely-used procedure where the Senate can approve budget-related measures by a simple majority vote, rather than the 60-vote threshold that's required on most Senate legislation.

Schumer leads a Senate that is split 50-50 between Democrats and Republicans, which under the Constitution gives Vice President Kamala Harris the deciding vote.

The question, though, is whether every Democratic senator would support restoring the SALT deduction either in upcoming economic stimulus legislation or other measures that might be considered through reconciliation.

"The SALT deduction tends to benefit states with many higher-earners and higher state taxes," Garrett Watson, senior policy analyst at the Tax Foundation, said in a blog post this week.

Watson's analysis showed that while New York was among the 10 states that would benefit the most from the deduction's restoration, West Virginia is among the 10 states that benefit least. And Sen. Joe Manchin of West Virginia, the Senate's most conservative Democrat, has not indicated what he would do on the controversial tax proposal, which would bring little benefit to his state.

The Tax Foundation also estimated that restoring the full SALT deduction would cost the federal government $673 billion over 10 years. And under the rules of reconciliation, lawmakers would have to find a way to fill that budget hole if they were to use that process to restore the SALT deduction.