October 23, 2019

S.J.Res, Disapproval of Salt Workaround Rules

NOTEWORTHY

Background: In exchange for lower marginal tax rates, the 2017 tax cut reduced the value of the state and local tax deduction for households that itemize. Some high tax jurisdictions responded to this change with workarounds that inappropriately enable taxpayers to re-characterize the payment of state and local taxes as charitable contributions. In June, the IRS issued new regulations designed to curb this behavior and preserve the policy intended by law.

Floor Situation: On October 22, the Senate began consideration of S.J.Res.50, a joint resolution of disapproval under the Congressional Review Act. The motion to proceed was agreed to by unanimous consent, and under the rule up to 10 hours of debate are in order.

Executive Summary: S.J.Res.50 would prevent the IRS from implementing the new regulations, effectively mimicking a repeal of the SALT cap. Repealing the SALT cap itself could increase the deficit by more than $600 billion over 10 years and would overwhelmingly benefit high-income households.

OVERVIEW OF THE ISSUE

The deduction for state and local taxes. For taxpayers who itemize, federal tax law provides an income tax deduction for state and local taxes paid. In 2017, the Tax Cuts and Jobs Act altered the resulting value of the deduction in two fundamental ways. First, by nearly doubling the amount of the standard deduction, the TCJA reduced the tax benefit of itemization overall, greatly simplifying the tax filing process for millions of taxpayers. Second, for tax years 2018 through 2025, the TCJA capped the amount of the deduction for state and local taxes unrelated to the conduct of a trade or business at $10,000, effectively reducing the federal tax subsidy for upper-income residents of high-tax jurisdictions.

When viewed in isolation, capping the SALT deduction raised taxes paid by high-income households. But these same households also received offsetting tax cuts through reductions in marginal tax rates and an increase in the Alternative Minimum Tax exemption. In general, most high-income households now have a lower tax liability post-TCJA, even with the capped SALT deduction.

IRS regulations. Some high tax state and local governments responded to the TCJA with workarounds – changes in their own tax laws that enable taxpayers to characterizing their state and local taxes as charitable contributions that could be deducted from federal income taxes without limit. To combat these abuses, the IRS issued new regulations curbing such behavior. In general, these regulations stipulate that the federal charitable tax deduction is not available to the extent that a taxpayer receives, or expects to receive, a corresponding state or local tax credit, invalidating the state-level workarounds.

Congressional Review Act. As part of the regulatory process, federal agencies are required to report to Congress any new rule or regulation or changes to existing ones. The CRA permits Congress to overturn an agency’s rule-making actions. Specifically, it outlines an expedited process whereby Congress may consider a joint resolution of disapproval. If the resolution is passed by the House and Senate and signed by the president, or if Congress successfully overrides a presidential veto, the underlying rule will have no effect. Senator Schumer has introduced S.J.Res.50, a joint resolution disapproving of Treasury’s new SALT cap regulations.

NOTABLE BILL PROVISIONS

The operative text of S.J.Res.50 is straightforward:

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Congress disapproves the rule submitted by the Internal Revenue Service, Department of the Treasury, relating to “Contributions in Exchange for State or Local Tax Credits” (84 Fed. Reg. 27513 (June 13, 2019)), and such rule shall have no force or effect.

By nullifying the restrictions imposed by the IRS regulations, the Schumer resolution would effectively repeal the SALT cap. States and local jurisdictions would be free to implement their workarounds.

According to one estimate, repealing the SALT cap could increase the deficit by more than $600 billion over 10 years and would overwhelmingly benefit the wealthy. According to the JCT, 94% of the benefit from repeal would flow to taxpayers with incomes over $200,000, and more than half would go to households with incomes over $1 million.

ADMINISTRATION POSITION

The president has not released a Statement of Administration Policy.

COST

As of the date of this publication, a CBO cost estimate for S.J.Res.50 was not available.