Southern California House members across the political spectrum have found an issue to rally around: repealing a Trump-era cap on tax deductions that hurts many residents in their districts.
The effort, some observers say, shows that even in an era of culture wars and ideological divides, kitchen table politics still matter.
“It illustrates that saying, ‘All politics are local,’” said Kirk Stark, a tax law professor at UCLA.
“It almost doesn’t matter what party you’re from on this issue,” Stark added. “If you’re a representative for people who are subject to high state and local tax burdens, it stands to reason that you would support repealing deduction limits on those taxes.”
What’s not yet clear is whether this spirit of bipartisanship will extend beyond Southern California. Around the country, the idea of repealing the Trump-era cap on state and local tax deductions presents hurdles for members of both parties.
Prior to the 2017 tax plan championed by House Republicans and President Donald Trump, Americans had been able to deduct any amount they paid in state and local taxes, also known as SALT, from their federal incomes. The 2017 law capped those deductions at $10,000, even for married couples filing jointly.
So, while most Americans did see a slight tax reduction under Trump’s plan, an estimated 11 million Americans who live in places where home values and state and local taxes are high — including large swaths of Southern California — have seen their taxes go up, since they’re no longer able to deduct their full property tax payments from their federal tax bills.
A majority of the impact has been felt by households making more than $1 million a year. But the California Franchise Tax Board estimates that 751,000 California households making less than $250,000 have also had to pay an extra $1.1 billion annually since the law took effect in 2018, for an average of about $1,460 more each year per family.
That, in turn, set off a political realignment of sorts. Last session, local House Democrats pushed to cut taxes, supporting stand-alone bills and COVID-19 relief packages that would have killed or severely curtailed the SALT deduction limit, But none of those efforts to cut taxes made it through the GOP-controlled Senate.
But many Republicans who won House seats in Southern California did so, in part, by promising to repeal the SALT cap. And now they’re pitching legislation and supporting talks to possibly reverse the $10,000 deduction limit as part of President Joe Biden’s planned $2 trillion-plus infrastructure bill.
“In our state, a middle-class married couple can quickly hit the cap if they work and own a home,” said Rep. Mike Garcia, R-Santa Clarita, whose first piece of legislation after taking office Jan. 7 calls for reversing the SALT deduction limit. “Removing the cap would put thousands of dollars of people’s hard-earned money back in their pockets.”
Locally, that makes sense. Nationally, it poses some political dilemmas.
For Republicans, a push to repeal the SALT cap is a push to unwind a portion of Trump’s tax plan, which is considered the signature legislation of his administration. The tax deduction limit also is particularly hard on blue states, such as California and New York, giving GOP representatives in red states little political motivation for backing the change.
That disproportionate impact on Democratic states is a main argument Gov. Gavin Newsom and six other governors of high-tax states made in an April 2 letter asking Biden to repeal the SALT cap.
But repealing the cap on SALT deductions primarily benefits wealthier Americans, something that’s hard for Democrats to support at a time when many representatives on the left already are backing new efforts to tax wealth. The change also would cost the federal government an estimated $620 billion in tax revenue at a time when Democrats are supporting plans to spend big on infrastructure and other public programs.
That’s why some progressive Democrats, such as New York Rep. Rep. Alexandria Ocasio-Cortez, have opposed unwinding the Trump policy.
Opponents on the right have argued that unlimited SALT deductions encourage state and local governments to raise taxes on the wealthy, since they know residents will be able to write them off at the federal level. Under that view, all federal taxpayers are subsidizing places with higher state and local taxes if there’s no a limit on SALT deductions in place.
Complicating the debate is this: The SALT cap already is set to expire in 2025.
That deadline could make it easier to unwind, Stark said, since a SALT cap repeal would simply accelerate a policy that was never meant to be permanent. But it also could make it harder for advocates to convince politicians who are on the fence that it’s worth sticking out their necks on a revenue source that won’t be around for long.
Republicans who support repealing the provision play up how the change in federal tax law simply exacerbates problems triggered by California’s tax rates.
“California’s high taxes hurt our state and our taxpayers. It’s not right to punish them again through the federal tax code,” said Michelle Steel, R-Seal Beach, who’s one of two representatives cosponsoring Garcia’s bill to reverse the cap.
While California does rank high for sales and income tax rates, California’s effective property tax rates are 0.76%, making it the 16th lowest property tax state in the nation. But California also ranks No. 2 in the country for median home price, which can mean pricey property tax bills that can’t be fully deducted under Trump’s plan.
Rep. Young Kim, R-La Habra, was an original cosponsor on a bill introduced in January to eliminate the deduction limit. It’s drawn support from Democrats and Republicans in Los Angeles and Orange counties.
In backing that bill and previous proposed SALT cap repeals, Democrats play up how those deductions encourage local governments to invest in local priorities, such as schools, roads, public safety and parks.
“The coronavirus pandemic is an especially potent reminder of the important work our state and local governments do, with them leading public health efforts on testing and vaccines,” Katie Porter, D-Irvine, said Monday. “Restoring the state and local tax deduction gives taxpayers and communities the ability to invest in their priorities and levels the playing field across states for federal taxation.”
Porter, who has been fighting to eliminate the cap since she first got elected in 2018, estimates that nearly half of taxpayers in her 45th District use the SALT deduction, with an average deduction of more than $22,000 per household.
Given the division on this issue at the national level, Stark expects that Democrats and Republicans might negotiate a compromise to either bump the allowed SALT deduction from $10,000 to, say, $20,000, or to eliminate the cap for all but the highest earners.
Both House bills that call for eliminating the SALT cap have been sent to the Committee on Ways and Means for consideration. And Biden is meeting this week with lawmakers to hammer out plans for an infrastructure bill that some representatives insist must include reversing the SALT deduction limit.