Democrats still hoping to restore state tax deductions lost under Trump

Democrats are struggling to come to agreement on how to lift a Trump-era tax deduction cap that has hit many Californians hard, one of the final unresolved issues in their social spending and climate bill.

Democrats are expected to provide some relief from the $10,000 annual cap placed on state and local taxes that can be deducted from federal returns. The so-called SALT cap was enacted in the 2017 Republican tax bill.

But progressive Democrats in the House and Senate are in conflict about how to do so.

The final proposal, which probably won’t be completed until the end of the month, could have a significant effect on Californians and residents of other high-tax states, including New York and New Jersey. Because of the importance of the policy to lawmakers in those states, many Democrats believe the bill won’t be able to get through the House without some form of SALT relief.

Dueling proposals released Wednesday underscore the fraught negotiations surrounding the social spending bill, even as House Democratic leaders try to schedule a vote by week’s end.

Democrats in the House, led by Reps. Tom Malinowski of New Jersey — perhaps the state hit hardest by the cap — and Rep. Katie Porter (D-Irvine), would lift the cap to $72,500 through 2031.

Porter calls this a deficit-neutral proposal that would “reverse the harshest consequences of the Trump tax law” by ensuring people don’t get hit by the cap because of where they live.

The $72,500 figure was chosen because under the complex way that Congress calculates the cost of its bill, the policy would not cost the federal government anything. That’s because under current law, the Trump-era cap is slated to end in 2025. This plan would keep a cap in place longer, but at a higher threshold.

But Sen. Bernie Sanders (I-Vt.) criticized the plan, saying it would cost over $50 billion per year and “provide 37% of its benefits to the top 1% ... giving the wealthiest people in the country a tax break.”

There are other Senate critics as well. Sen. Michael Bennet (D-Colo.) said the House plan “cuts taxes for millionaires and billionaires on the backs of low-income and middle-income families. We should fix this in the Senate.”

Sanders and Sen. Robert Menendez (D-N.J.) released an alternative plan that would eliminate the cap for families making less than about $400,000 a year.

“We still gotta do a little more tweaking here” on the income level, Sanders said. But it will not be “for millionaires or billionaires.”

Porter criticized that proposal because she said it would still benefit wealthy hedge fund managers and entrepreneurs who find ways to avoid reporting annual income.

“I don’t think — with great respect for Sen. Sanders’ commitment to making sure that big corporations and the super wealthy pay their fair share — I don’t think his proposal does what he thinks it does,” she said.

Whatever tax relief the House passes in its social spending will still be subject to change in the Senate in the coming weeks.