When then-candidate Donald Trump told a Long Island rally in September that he wanted to lift the $10,000 cap on state and local (SALT) deductions for federal income taxes, New York officials foresaw a windfall that could boost state coffers and keep wealthy taxpayers from leaving.
Republican representatives in the state like Mike Lawler centered their reelection campaigns on following through on that promise with Hudson Valley Congress member calling it the most important issue for voters in his district. At the time, the case for so-called no cap seemed to be gaining momentum.
But even before now-President-elect Trump is inaugurated, his advisors have signaled they are working on a proposal that would only double the cap to $20,000 — and possibly only for married couples.
That move would provide little benefit to New York taxpayers and potentially set up a confrontation between the Trump administration and the state’s Republican representatives in the House.
“The SALT tax proposal being floated by advisors to President-elect Trump is nothing more than an empty gesture,” Gov. Kathy Hochul said in a statement over the weekend. “It fails to deliver the meaningful relief working families desperately need as they struggle with rising costs.”
Before 2017, taxpayers who itemized their deductions could deduct their state and local taxes from the federal income tax due, reducing their payment to the IRS. But Trump’s 2017 tax bill capped the deduction at $10,000, far less than many New Yorkers pay.
The state says that New Yorkers pay $12 billion a year more in federal income taxes than if they could deduct all their state and local taxes..
Republicans in the first Trump administration instituted the cap because they needed to reduce the impact on the deficit of the big tax cuts they were enacting — and the limit affected primarily blue states like New York, California, New Jersey and Connecticut with high income taxes.
Florida, Texas and Nevada, for example, have no state income taxes for individuals and thus are unaffected by the cap.
Efforts by Democrats to repeal the cap during the Biden administration stalled in part because progressive Democrats like Queens Rep. Alexandria Ocasio-Cortez opposed what they saw as a giveaway to the rich.
In addition, the cost of reinstating unlimited SALT deductions is a whopping $1.2 trillion over the next decade, according to the Penn Wharton budget model, making it difficult to justify amid ballooning federal budget deficits.
Protecting the Wealthy
Because the individual tax cuts passed in 2017 expire at the end of next year, Congress and the Trump administration are under enormous pressure to prevent a tax hike for most Americans. In addition, Trump has promised another major reduction, especially in the corporate income tax.
Last week, key Trump advisor Stephen Moore said the Trump economic advisory committee was likely to propose doubling the cap and was considering whether to do so for everyone or just married couples.
He said they were opposed to making SALT deductions unlimited because that would amount to “the biggest tax cut to millionaires and billionaires ever.”
While tax experts have yet to crunch the numbers on a $20,000 limit, it would likely provide only a modest impact in New York.
For example, the 2017 bill greatly increased the standard deduction, so many middle-income New Yorkers saw very little impact from the end of their SALT deductions. Nationally, 90% of taxpayers take the standard deduction rather than itemizing, according to the IRS.
Since the standard deduction increases with inflation, it will reach $30,000 for a married couple next year, notes Ana Champeny, vice president for research at the Citizens Budget Commission. With the cap at $10,000, a couple would need $20,000 in mortgage interest, medical expenses or charitable donations to justify itemizing. At $20,000, they would still need $10,000 in non-tax deductions. Few New Yorkers would reach those thresholds.
But lifting the cap completely would have a major impact on the wealthy. Millionaires pay 40% of all the $107 billion in income taxes the state collected last year, and the top 200,000 filers pay half. Being able to deduct those payments from their federal tax would give them big savings.
“In terms of our competitiveness for wealthy New Yorkers, who disproportionately pay a huge share of our taxes, and who we need to keep here instead of flying to Texas, it’s not going to be a game changer,” said Andrew Rein, president of the Citizens Budget Commission.
While Hochul will have a hard time making the argument that the issue is about working families, the limited help from doubling the cap will result in intense pressure on New York’s seven House representatives. They promised to lift the cap in their campaigns — and because Republicans have only a five-vote majority in the House, the New Yorkers could block any tax bill that does not provide more benefit to the state.
Lawler, who represents suburban Westchester and Rockland counties, says he remains committed to lifting the cap.
“I’ve been very clear from the start that I will not support a tax bill that doesn’t lift the cap on SALT,” he told THE CITY Tuesday. “I will work with colleagues in both parties to negotiate a number that provides the tax relief New Yorkers desperately need thanks to the failed policies of Kathy Hochul and Albany Democrats.”
