Democrats are staging a long-shot attempt to chip away at the Republican tax law’s limit on state and local tax deductions, finding few GOP allies despite potential benefit for Republican-led states.
Senate Minority Leader Chuck Schumer plans to force a vote Wednesday that would invalidate Treasury Department regulations prohibiting proposals in high-tax states to get around the cap on the state and local tax, or SALT, deductions that was part of the 2017 GOP tax law.
States including New York, New Jersey and Connecticut responded to that tax overhaul by passing laws to create charitable funds where residents could contribute their state tax payments, effectively bypassing the SALT limitation.
The regulations outlawing this practice are also slowing donations to similarly structured charitable funds for private school tuition vouchers in Republican-led states such as Alabama and Georgia. Democrats are hoping to use this as a way to persuade Republicans to back their effort to overturn the regulation, according to Senator Patty Murray, a Washington Democrat.
Republicans, however, have resisted helping Democrats score a political win by undermining regulations written by President Donald Trump’s Treasury Department.
Senate Majority Leader Mitch McConnell criticized Democrats in a floor speech Wednesday, saying it was “downright comical” that their “top priority” is to unwind part of the law in a way that would primarily help high-earning people. Democrats have said the tax-cut law did too much to help the wealthy and not enough to boost the middle class.
“People got significant benefits in other areas” from the tax law, said Senator James Lankford, an Oklahoma Republican. “That was part of the trade-off. We need to keep the regulations where they are.”
GOP Senator David Perdue of Georgia said the federal government “can’t keep subsidizing these high-tax states,” telling Fox Business Network on Wednesday morning, “This is not going anywhere in the Senate.”
An attempt to roll back the limit is unlikely to pass, and if it did Trump would veto it.
The tax law capped deductions for SALT at $10,000. The tax break was previously unlimited. The change was felt most acutely by taxpayers in states where incomes and housing prices are high, places that tend to vote for Democrats. Representatives from those states say Republicans targeted their voters to pay for the tax-cut law.
In response, states passed laws where a resident could, instead of paying state property taxes, choose to donate to a state-created charitable fund. That person could then write off the contribution as a charitable donation on his or her federal taxes and get a state tax credit for some of that, easing the sting of the lower write-off for their SALT levy.
States, including Illinois, Oklahoma and Arizona, have for years offered similar charitable funds that grant scholarships to private and religious schools. Treasury’s SALT regulations, which became final in June, ended up putting limits on the federal tax breaks those donors could claim.
Scholarship granting organizations have received fewer donations as a result of the rule change, said Leslie Hiner, vice president of legal affairs at EdChoice, a school choice advocacy group. States offering credits worth 50 percent of the donation have seen contributions drop by about 20 to 30 percent, and states with more generous tax breaks have seen funding levels fall even further, she said.
“When they lose a source of revenue students are at risk of not having a scholarship funded,” Hiner said. “We don’t know the full impact yet, but scholarship-granting organizations have seen pretty sizable losses across the board.”
Democrats have so far been unsuccessful at any attempt to mitigate the SALT changes. Last month, a federal judge tossed a lawsuit brought by New York, New Jersey, Connecticut and Maryland to invalidate the tax law’s $10,000 deduction limit.
House Democrats are also working on a plan to increase the deduction limit or repeal it entirely, though any legislative action would likely stall in the Republican-led Senate.
Even if the Senate Democrats’ bid to repeal the regulations doesn’t pass, the effort allows them to show voters they’re working on the issue. Schumer, a New York Democrat who has called the tax law “a devastating blow,” said he’s “very excited” to force the vote on the Senate floor.
— Laura Davison, with assistance from Kathleen Miller
Bloomberg News
