House Democrats successfully passed a short-term repeal of the SALT cap in 2019, but the Senate didn’t consider it.
It’s an expensive proposition to fully repeal the SALT cap. Restoring the tax break would cost about $620 billion over a decade, according to an estimate from the Urban-Brookings Tax Policy Center. That’s about twice the cost the $1,200 stimulus payments Congress approved in March for most Americans. However, the Tax Policy Center projects that most benefits would fall to top earners, leaving middle-income households with an average tax cut of $10.
Democrats could opt to do something short of a full restoration of the SALT tax break that would blunt the disproportionate share going to the richest earners, said Seth Hanlon, a senior fellow at the Center for American Progress.
“For example, the cap could be raised but not eliminated, or Congress could extend cap relief only to households under a certain income level,” he said. “These options would cost a fraction of the revenue of total SALT cap elimination, and would be targeted at middle-class families.”
A more generous SALT break could also be coupled with tax increases on top earners that would cut into some of the savings they would receive.
A reversal of the SALT cap could also have an unintended consequence for state and local government coffers, another concern for Democrats. When the cap went into effect, it spurred a record municipal bond buying spree with investors turning to the tax-free securities as a tool to shrink their tax bills. Unwinding the cap risks doing the opposite -- imposing a slight dampening effect on markets with high taxes like New York and California.
Reversal would be a slight positive at the local level, and negative for states, both of which are struggling with economic fallout from the coronavirus pandemic, said Barclays Plc strategist Mikhail Foux.
--With assistance from Nic Querolo.
This article was provided by Bloomberg News.