On Tuesday, former President Trump announced support for lifting the cap on the State and Local Tax deduction, a move which has wide support from municipal bond issuers.
Trump made the announcement via his Truth Social network as part of a personal post saying, “I will turn it around, get SALT back, lower your taxes, and so much more. I’ll work with the Democrat Governor and Mayor, and make sure the funding is there to bring New York back to levels it hasn’t seen for 50 years.”
The update was posted as a prelude to a rally Trump was holding Wednesday on Long Island, an area where the cap is especially unpopular. Observers postulate Trump may be making the promise to influence New York’s congressional battles. Bond issuers remain skeptical but hopeful of his chances of success.
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“Many Republicans on Long Island have long since attempted to work across party lines to eliminate the cap,” said Emily Brock, director, federal liaison center, Government Finance Officers Association.
“With the pandemic and lack of tax titles to address it, the bipartisan efforts haven’t been super successful. This one tiny mention could propel the conversation forward at least to engage the coalition again.”
Limiting the SALT deduction was enacted as part of the Tax Cuts and Jobs Act of 2017, which is considered Trump’s biggest legislative accomplishment during his term. The cap is touted as a money maker for the federal government but opposed by bond issuers who maintain the cap infringes on their sovereign ability to levy future taxes.
Critics also point out that the law is unfair for residents of high tax states. As a workaround, 36 states and New York City have enacted pass-through entity exemptions that allow business owners to pay income taxes as a business as opposed to a partner or shareholder.
Trump’s post contained no details of how eliminating the deduction would be accomplished or how the revenue it generates would be replaced.
Several iterations of eliminating or adjusting the cap have been proposed and abandoned in Congress including the SALT Marriage Penalty Elimination Act proposed by Rep. Mike Lawler, R- N.Y., in February
According to numbers from the Tax Foundation, increasing the deduction to $20,000 from $10,000 for joint tax filers who earn under $500,000 in adjusted gross income in 2023, “would cost about $11.7 billion. If the proposed change was extended to 2024 and 2025, it would cost another $25.5 billion over those two years.”
Tinkering with the cap is likely to be a high-priced bargaining chip during the overall negotiations that will determine the fate of the TCJA provisions that are scheduled to expire at the end of 2025.
“It’s an expensive chip,” said Brett Bolton, SVP Bond Dealers of America. “I read that bringing that (deduction) back fully would cost over a trillion dollars over a 10-year budget cycle.”
“How are you going to pay for that? Where is that money going to come from? I assume people from the Hill are telling them that, but during the election, I don’t think it’s really mattering all that much.”