Without the GOP, Biden will need to craft a deal with his own party’s lawmakers. Some Democratic moderates, such as West Virginia Senator Joe Manchin, have said they want to limit the size of the tax increases.
A bigger constituency Biden will need to woo is a group of House lawmakers largely representing districts in New York, New Jersey and California, who demand an expansion of a tax deduction that Trump limited in 2017. More than 20 Democrats have said they won’t vote for Biden’s plan unless the $10,000 cap on state and local tax, or SALT, deductions is addressed.
That bipartisan group, which organized into a congressional caucus earlier this month, will have even greater cause given the concentrated effect on wealthy taxpayers in their districts of the tax proposals on capital Biden is set to unveil.
California and New York are the No. 1 and No. 2 states where millionaires, who would be affected by the capital gains proposal, reside, according to IRS tax return data. Lawmakers say without a more generous SALT deduction, their residents will flee to low-tax states, such as Florida or Texas.
“With backing from our recently announced bipartisan SALT Caucus in the House, it’s clear any package that does not address the SALT deduction cap will not move,” Representative Mikie Sherrill, a New Jersey Democrat, said in a tweet on Thursday.
The tussle with the White House, which has telegraphed there won’t be a repeal of the SALT cap in Biden’s proposals, will likely be an expensive battle to resolve. The cost of a full removal of the SALT cap is $88.7 billion a year, and advocates are pushing for a multiyear repeal.
The trade-offs for a bigger SALT tax break could end up meaning even more tax hikes, doing more to harm than help the New York-New Jersey-Connecticut area, said Erin Sykes, chief economist for Nest Seekers International, a real estate brokerage firm.
“This capital-gains increase would make the struggle so much more for the Northeast to recover after Covid,” she said. “The negotiation of SALT doesn’t really help anybody all that much because the high net worth individuals will be paying more taxes through their businesses.”
The SALT deduction has also generated some controversy because a full restoration of the tax break would largely benefit the wealthy—more than half of the tax savings would go to those making more than $1 million, according to the nonpartisan scorekeeper the Joint Committee on Taxation. That’s criticism from some Democrats. Progressive Representative Alexandria Ocasio-Cortez of New York called it a “giveaway to the rich” and said that Biden’s infrastructure package shouldn’t be held hostage to a full repeal of the SALT cap.
—With assistance from Gregory Korte.
This article was provided by Bloomberg News.