Congress fighting over SALT

Now the tax bill in the U.S. House of Representatives proposes raising the deduction’s cap to $40,000, though the U.S. Senate bill would keep the cap where it is.

The debate over raising the so-called SALT (state and local taxes) deduction cap has been contentious. A higher cap would benefit high-income people who many experts say don’t need another tax break. But another part of the proposal would get rid of a workaround that individuals and small business owners have been using to reduce their personal income tax.

Nikhita Airi, a research associate in the nonpartisan Urban-Brookings Tax Policy Center, wrote in an analysis that raising the cap “would be expensive and deliver little benefit to most taxpayers.” Nationally, about 10% of taxpayers who itemize use the state and local tax deduction, she told CalMatters.

That number is higher in California, where about 2.8 million taxpayers — or 15% of those who filed taxes in the state — claimed the deduction in 2022, according to the most recent data available from the IRS. The highest percentage of those who used the deductions were in some of the wealthiest parts of the state, such as Marin, Santa Clara and San Mateo counties, according to Airi’s analysis.

While some experts agree with the sentiment that raising the cap would benefit mostly wealthy taxpayers, it would actually help “the working rich” in high-cost California, said Dennis Ventry, a professor at the UC Davis School of Law who focuses on tax policy.

Ventry was referring to people whose annual income is between $250,000 and just under $500,000 — who are likely to itemize their deductions.

For example, raising the cap could mean California residents could deduct the full cost of their property taxes, he said. The median price of a home in the state is $900,000. Although it varies by county, the property tax for such a home would be about $9,000 annually. Raising the deduction cap would allow many homeowners to deduct their property taxes as well as other state and local taxes.

“That’s a big deal,” Ventry said. “Or it pays for your child care so your spouse can reenter the workforce.”

The House proposal would allow the increased cap to apply to those with annual incomes of $500,000 or less. Taxpayers who make more would be subject to the $10,000 cap.

More than 20 California Democrats in the House — led by U.S. Reps. Dave Min of Costa Mesa, Zoe Lofgren of San Jose and Mike Thompson of Napa — actually pushed for no cap on the deduction. They wrote in a May letter to House Speaker Mike Johnson and House Committee on Ways and Means Chairman Jason Smith that the state’s taxpayers “pay more than their fair share of taxes to our nation and deserve tax relief in these difficult economic times.”

U.S. Rep. Young Kim of Anaheim — a Republican member of Congress — was pushing for a $62,000 deduction limit, advocating for a higher cap along with her colleagues from other high-tax states such as New York and New Jersey. Kim represents parts of Orange, Riverside and San Bernardino counties, where almost half of homes are worth more than $1 million.

It’s no surprise that the Senate kept the cap at $10,000. “There is no Republican senator from a high-tax state,” Alan Auerbach, professor of economics and law at UC Berkeley, said. “If the Senate had a choice, it would not include this provision.”

Another part of the proposed tax bills would partly get rid of workarounds that certain taxpayers have been using — by paying state taxes through a business entity, owners can effectively bypass the federal deduction cap and count the payments toward their personal state income taxes.

Without the workaround, individuals and small businesses with incomes under $500,000 — such as doctors with private practices or lawyers or financial professionals with their own firms — could be subject to whatever deduction cap Congress eventually agrees on. But, as authors of an analysis by the Tax Law Center at the New York University School of Law wrote, the House bill included exceptions to shutting down the workaround — depending on the types of taxes being paid.

Darien Shanske, a professor at the UC Davis School of Law who focuses on state and local taxation, said that the discussion about these tax proposals can “make it hard to give a straight answer … it clearly skews toward wealthier people.”

In the case of getting rid of the cap workaround, for example, Shanske said it would be more palatable if, say, “they were doing it to fund universal pre-K.” But he said “this is being done to retain low taxes on [big] corporations. You’re increasing taxes on smaller businesses. That’s problematic.”