State-Local Tax Cap Jitters Could Force GOP to Rethink Tax 2.0

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Kaustuv Basu

Passing a second round of tax cuts right before Election Day seemed like a good idea a few months ago to help the GOP keep its majority in Congress. That was then.

Now questions over whether to include the $10,000 cap on state and local tax deductions as part of a broader effort to make the 2017 tax law’s individual provisions permanent could force Republicans to reconsider how to move forward on a “Tax 2.0" package before the midterms.

The SALT cap, set to expire at the end of 2025, remains one of the bill’s most controversial provisions in high-tax Democratic states such as California, New Jersey, and New York. Some lawmakers are warning that a vote on such a package could hurt Republicans in tight blue-state races and put a GOP-controlled House in peril.

House Republicans are hoping to release a second package of tax cuts in September that would make permanent individual and small business tax cuts in last year’s overhaul, promote savings through retirement accounts and boost innovation. Republican leadership has pitched the bill as a messaging tool, designed to sell voters on the GOP’s agenda.

But among rank-and-file Republicans, there are growing concerns about whether the legislation would win enough votes on the floor, a Republican congressman close to House leaders said on the condition of anonymity. The Ways and Means Committee could still vote on a package, but there are no assurances at this point that the chamber would vote on it, another Republican lawmaker told Bloomberg Tax.

House Republicans in tossup races from high-tax states—there are at least eight currently, according to the Cook Political Report—are worried that voting on a second package just weeks before the elections can do more harm than good, sources familiar with the discussions said.

A top Democratic aide questioned whether it was worth it for Republicans to make Reps. Peter Roskam (R-Ill.) and others in tough races such as Reps. Erik Paulsen (R-Minn.) and Carlos Curbelo (R-Fla.) take another vote on the tax cuts that haven’t proved to be as resoundingly popular as Republicans had hoped.

House Speaker Paul Ryan’s office referred questions on a Tax 2.0 package to House Ways and Means Committee Chairman Kevin Brady (R-Texas).

Tax 2.0 Confidence

Brady is working with House Republicans to “craft the best package to help middle-class families,” a committee spokesman said in a statement. “We’re confident the elements of Tax Reform 2.0 will pass the House with wide support.”

He could push for a vote on a bipartisan package of noncontroversial bills, focusing on retirement, innovation, and other provisions that are more acceptable, a Republican lobbyist, who spoke on the condition of anonymity, said. The lobbyist added that there is still active debate on what could get into a second tax cuts package as leaders count votes.

Brady is in a quandary. Making the SALT cap permanent could affect the electoral prospects of some members. Keeping SALT out of the package would signal that Republicans are abandoning the issue early, especially when a majority of Republicans in Congress back the deduction cap.

The idea of capping the deduction was divisive in the run-up to the passage of the 2017 tax bill: 12 House Republicans ended up voting against the final version of the legislation, almost all of them from New Jersey and New York. If the House were to flip in November, Democrats have said they’ll begin efforts to repeal the SALT cap.

A Winning Message?

Republicans want to remind voters of their chief legislative accomplishment while extracting a political price for Democratic opposition to a tax revamp that widely benefited voters, said Liam Donovan, a former aide to the National Republican Senatorial Committee.

“A floor vote to make the individual and small-business cuts permanent might do that, but it could also revive the sensitive issue of SALT for vulnerable blue state incumbents while prompting deficit concerns from the right and the left,” Donovan, now a principal with Bracewell LLP, said. Brady said previously that making the individual tax cuts permanent would cost about $600 billion.

The Republicans in toss-up districts don’t want to make the SALT deduction cap permanent because they want to say they’re still fighting to repeal it, the Republican lawmaker close to leadership said. Rep. Leonard Lance (R-N.J.) is one of them. His office said in an email that he opposes making the SALT cap permanent. The offices of other Republicans in toss-up districts didn’t respond to requests for comment.

The SALT questions come as Republicans are discovering that the tax overhaul is not the electoral bonanza they hoped it would be. A June Quinnipiac University poll found that 39 percent of respondents approved of the new tax law while 46 percent disapproved. And a paper published by the Brookings Institution Aug. 27 found the tax bill was “unlikely to shift many voters from their partisan camps.” Any electoral advantage from the bill would be negligible in the midterms but Democrats could use it to rouse their base, the study said.

Republican staff members, present and past, have said that many of the law’s tax benefits, such as an expanded child tax credit provision, will only become obvious during the 2019 tax filing season, after the midterm elections. The president’s unpredictability has added to the challenges, they said. In April, for instance, Trump was in West Virginia to talk about taxes but ditched his prepared comments, saying they were “boring.”

Another challenge is that campaign consultants tend not to be “policy-oriented” and tax policy is notoriously hard to explain, said Ryan Ellis, a Republican tax lobbyist. “To the extent it hasn’t been done, shame on us,” but “we still have a chance to do it” and have every reason to do it, he said.

Sen. Rob Portman (R-Ohio) has a solution. “We just need to communicate that this is helping middle class families. That’s a surprise when people learn that they are getting a doubling of the standard deduction and doubling the child tax credit,” he said. “They need specifics.”

Request Daily Tax Report®