Tax Overhaul 2.0 Revives SALT Deduction Debate

Kevin Brady is about to roll out legislation making a $10,000 cap on the state-and-local-tax deduction permanent, along with other provisions from last year’s tax bill. It could be a complicated vote for some Republicans.

House Ways and Means Committee Chair Kevin Brady at a committee hearing on trade policy March 21
AP Photo/Jose Luis Magana
Sept. 5, 2018, 8 p.m.

One of the most controversial parts of last year’s tax code overhaul is back for the sequel.

House Ways and Means Committee Chairman Kevin Brady is set to release text of his “Tax Reform 2.0” in the coming days, with committee action next week. The effort will likely roll out as several bills, with one making permanent the temporary individual tax provisions from last year’s code overhaul that are now set to expire in 2025. Other proposals would cover retirement savings and business investment.

“It’s full steam ahead on 2.0 because the main question here is, will we make the tax cuts for families and small businesses permanent as we did for corporations? The answer is yes,” Brady told reporters Tuesday.

But there’s another provision set to be made permanent, according to Brady: the $10,000 cap on federal deductions of state and local taxes. As the overhaul made its way through Congress last year, the SALT cap drew resistance from some Republican House members in high-tax states, with a few ultimately siding with Democrats against the bill. Now the issue is roaring back, just as lawmakers get ready for their final push in the 2018 midterms.

The pressure is on for Republicans who voted for the tax bill and whose predominantly Democratic states have high taxes, like New York’s John Katko and Tom Reed, Illinois’ Peter Roskam and New Jersey’s Tom MacArthur. Some of their challengers have leveraged the tax vote against them in their campaigns.

“I think it presents a real, challenging set of issues for Chairman Brady and the leadership in the House,” said Jon Traub, a managing principal at Deloitte and a former staff member on the Ways and Means Committee. “On the one hand, they may have some members who come back from the recess and say, ‘This issue is really hurting me back home, I don’t want to vote on this again; it puts me in a really bad position.’ ”

But backing off the provision could be equally problematic, Traub said.

“If they decide to move forward with permanence without it, it’s sending up a white flag saying they made a big mistake in the first bill, and I don’t think that’s a signal they’re eager to send,” Traub said.

Last year’s tax bill hasn’t been the electoral boost that many Republicans had hoped for. A Monmouth University poll in June found that just 34 percent of the public approved of the tax bill and 41 percent disapproved.

Traub said that while the economy is getting lots of play in campaigns, it’s not being tied back to the tax bill. Voters filed their taxes under the old code in April and have yet to see some of the legislation's benefits.

“The thesis behind 2.0 is that it will help Republicans make the sale, that ‘you should vote for us because we’re providing tax relief, and Democrats will take it away from you,’ ” Traub said. “And I understand that, but I think—certainly my vision from D.C.—[is] that the tax bill is not exactly featuring prominently in lots of races.”

But while last year’s vote was tough for some blue-state Republicans, that political liability may now be built in, making another vote less damaging.

“I suspect it’s something they can overcome,” said Rohit Kumar, a principal at PwC and a former aide to Senate Majority Leader Mitch McConnell. “The reason they think that is, you have to remember, when the House voted on the original version of the Tax Cuts and Jobs Act, the one that the House sent to the Senate, that bill did not contain any sunsets.”

Lawmakers eventually sunset many of the individual tax provisions to conform to a $1.5 trillion spending limit in the Senate, so the final version of the bill contained a slew of temporary tax breaks as well as the temporary SALT deduction cap.

“There may be a few that are not excited about not taking the vote again so close to the election, but I think the vast majority who were comfortable with it the first time understand that whatever liability that created, that liability was already there,” Kumar said.

If Brady is successful in advancing the bill through the House, that’s where it may stay. Beyond the SALT issue, it makes little strategic sense for Senate Republicans to take up the bill before the midterms, if ever, Kumar said.

“That’s because McConnell has done the math—and the math is not hard. He would need nine Senate Democrats, along with 51 Senate Republicans, and I don’t know that it’s a slam dunk that you get all 51 Republicans,” Kumar said.

Compounding the slim chances of passage, it may also be bad politics to let some red-state Democrats take a vote on a bill to make permanent the individual tax breaks after voting against the full tax bill last year. Lawmakers such as West Virginia’s Joe Manchin, Indiana’s Joe Donnelly, and North Dakota’s Heidi Heitkamp could use that vote as a way to shore up support from conservative parts of their constituency.

“It then allows them to go back home and say, ‘I voted to make the individual stuff permanent when I had a chance to do so,’ and to the extent that their no vote last year is sort of a political liability, this vote would allow them to salve the wound, and that’s not what McConnell wants,” Kumar said.

Senate leadership appears to share that view, broadly.

“I think we would all love to do Tax Reform 2.0, to include making the individual tax rates permanent, along with some other reforms that members of the House and/or Senate have advocated, but the likelihood of that happening before the election is probably slim to none,” Sen. John Thune, a member of leadership and a senior member of the Finance Committee, told reporters Wednesday.

That salve may have been appreciated by some vulnerable Senate Democrats. GOP challengers to several red-state Democrats have weaponized their tax bill vote against them in in the past few weeks.

“[Trump] needs a true ally, not somebody that says something when you’re in Indiana and does something different when you’re in D.C.,” said Mike Braun, who is challenging Donnelly for his Indiana seat, at an August rally. “Joe Donnelly voted against tax reform.”

In West Virginia, which went for Trump by 42 points in 2016, Democratic Sen. Joe Manchin is feeling the heat from his challenger as well.

“He opposed the tax cuts,” Patrick Morrisey, who is running against Manchin, said at an August rally with President Trump. “Remember, this is West Virginia. We benefit as much or more than anyone from the Trump tax cuts.”

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