Trump says he’s ‘open’ to changing the cap on state and local tax deductions, but Grassley isn’t

President Trump said he’d consider changes to a cap on the federal deduction for state and local taxes, one of the most divisive provisions of the 2017 Republican tax overhaul.

Trump told regional newspaper reporters in response to a question Wednesday that he’s “open to talking about” revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns.

“There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,” he said.

The remarks were reported earlier in the Stamford Advocate.

While Trump offered no specifics on the complaints or what he might do, even his hint held the potential for enormous interest in California, New York and other high-tax states and municipalities. The SALT cap has hit taxpayers there particularly hard, because of higher state levies, property values and real estate taxes.

The cap was a key revenue raiser in the $1.5-trillion tax-code overhaul, which slashed rates for business and individuals. Lifting the cap would cost around $673 billion over a decade, according to the conservative Tax Foundation, a sum that might require raising the newly lowered 21 percent corporate rate to absorb the cost.

Despite Trump’s remarks, the idea appeared to be dead already on Capitol Hill.

Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), via a spokesman, shot down the idea of altering the SALT cap.

“It’s ironic that the same Democrats who criticized the Tax Cuts and Jobs Act for supposedly benefiting only the wealthy are now advocating for a change to the law that would primarily benefit the wealthy,” Grassley spokesman Michael Zona said in a statement.

But Rep. Bill Pascrell Jr. (D-N.J.) said legislation would be introduced in the House.

“First of all, Mr. Grassley doesn’t know the facts. The average person makes $200,000 who applies for this deduction,” he said, noting that that figure comprises 30% of homeowners in his state. “We need to take care of this deduction.”

High-tax states are largely Democratic, and some officials in those states have complained that the cap was designed to punish Democratic voters.

In a tweet, Grassley’s committee termed the SALT deduction “a federal subsidy for states to raise taxes on their residents without political consequence.”

In three of the states most affected — California, New Jersey and New York — Republicans lost 14 U.S. House seats in the 2018 midterms, accounting for about a third of the party’s overall losses. Additionally, two lawmakers key to crafting the Republican tax overhaul — former Reps. Erik Paulsen of Minnesota and Peter Roskam of Illinois — lost their seats after campaigns in which the unpopularity of the new law was a major issue.

Sen. Robert Menendez (D-N.J.) vowed Tuesday to block the nomination of Michael Desmond to become chief counsel at the Internal Revenue Service over the cap. New York Gov. Andrew Cuomo (D) said recently that the SALT cap and other tax changes had prompted a $2.3-billion shortfall in state revenue in December; he blamed the cap for causing some taxpayers to flee to states such as Florida, which has no state income tax. In Connecticut, the cap will cause residents to pay an additional $2.8 billion in taxes for the 2018 tax year, according to state figures released last July.

Those states, along with Maryland, sued the Treasury Department, the IRS and the Trump administration in Manhattan federal court in July, challenging the cap as infringing upon their state authority among other claims.

In New York’s Westchester County, the average property tax bill was $14,654, according to an April 2018 report by the New York State Assn. of Counties.

Democrats in Congress, including House Ways and Means Chairman Richard E. Neal of Massachusetts, have already vowed to tackle the SALT cap. “We are going to revisit the SALT deduction, I can tell you that,” he told a business forum on Nov. 27.

Still, it’s not clear that any changes would be enacted into law, given that many Republicans support the cap, as do many Democrats outside of the high-tax Northeast and California.

The annual SALT cap runs through the end of 2025. States have offered workarounds, but the IRS has blocked most of them, including one involving charitable donations in exchange for credits on property tax payments. California’s Legislature passed a plan last year to expand the deductibility of donations to the Cal Grants education program, but it was vetoed by then-Gov. Jerry Brown. The IRS hasn’t weighed in on a plan by Connecticut to offer owners of partnerships and other so-called pass-throughs a state credit.