Advisers want Congress to restore the SALT deduction

As Congress advances sweeping budget legislation, investment advisers are hoping lawmakers include a provision that would restore a deduction for state and local taxes.

The Democratic-majority Senate approved early Wednesday morning along narrow party lines a $3.5 trillion budget resolution that provides the foundation for a bill that would fund a wide range of spending on social, climate and health care programs, among other areas.

Under the process for constructing the so-called budget reconciliation bill, congressional committees will write legislation that fleshes out Biden administration priorities.

The Senate Finance Committee contribution, for instance, must include a provision for “SALT cap relief,” according to a memo to Democratic senators from Senate Majority Leader Charles Schumer, D-N.Y.

The finance panel also must come up with spending offsets like increasing taxes on corporations and high-income individuals. The deadline for congressional committees to complete their work is Sept. 15.

That SALT relief instruction targets the $10,000 limit on the deduction for state and local taxes that was implemented under the 2017 tax reform law.  

Democrats from high-tax states like New Jersey have pushed to eliminate the SALT ceiling. It’s also an idea that has traction among investment advisers.

“My clients have lost a lot of tax money because of the limitation,” said Joanne Burke, owner of Birch Street Financial Advisors in Vienna, Va.

Her practice is located in Fairfax County, where property values and related taxes are high.

“Folks in our area should be able to deduct these taxes to the fullest extent,” Burke said. “The $10,000 limit is arbitrary.”

Eric Thomas, principal at Clarity Capital Management in Portland, Ore., said his clients tend to hit the $10,000 SALT deduction limit.

“All of my clients are paying more taxes because of the maximum SALT deduction,” Thomas said. “All of my clients and our firm would support total relief from SALT. Oregon’s income tax has become more expensive.”

Republicans, who put the SALT deduction cap in the 2017 tax reform bill to pay for other tax breaks, criticize Democrats who want to restore the deduction. In a twist, the GOP accuses them of backing a give-away to the wealthy -- a charge usually leveled at Republicans.

But the high-tax states where it causes the most pain also tend to be Democratic-leaning.

“It hurts the blue states like California and New York more than red states like Texas and Florida,” said Sam Huszczo, founder of SGH Wealth Management in Detroit, Mich. Restoring the SALT deduction “will benefit the wealthy more than the majority of the base of the Democratic Party.”

Chris Chen, an adviser at Insight Financial Strategists in Newton, Massachusetts, made a similar calculation.

“Even Democrats want to take care of their high earners,” Chen said. “It seems that lifting SALT restrictions looks like it is going to help the people who are going to be hurt by increases in income tax and capital gains rates.”

But Thomas said SALT also is being rubbed into the middle class.

“This absolutely affects middle-income households just as much if not more than high-income earners,” Thomas said. “It’s not fair for the middle-income families that are in those blue states.”

Some progressive Democrats oppose raising or eliminating the SALT cap.

“This will be a moment where the divided factions within the Democratic Party will have their first test,” Huszczo said.

POTENTIAL TAX INCREASES

The $3.5 trillion budget bill will be considered under a parliamentary procedure known as reconciliation that prevents a filibuster by Senate Republicans. That means that all 50 Senate Democrats must back the measure for it to be approved with the added vote of Vice President Kamala Harris.

The reconciliation instructions require the spending to be offset by new tax revenues, health care savings and long-term economic growth, according to the Schumer memo. The Biden administration has proposed increasing individual and capital gains tax rates for Americans making more than $400,000 annually.

But another idea -- ending step-up basis and taxing investment gains on inherited assets -- may be faltering. During 14 hours of voting on non-binding amendments to the budget resolution, one written by Sen. John Thune, R-S.D., to protect step-up basis received unanimous support.

“It sends the signal that this pay for might cause [Democrats] some hesitation if it ends up in the coming reconciliation tax package this fall,” said Palmer Schoening, chair of the Family Business Coalition.

The challenge for Democrats will be to come up with a mix of spending and tax increases in the budget reconciliation bill that will keep moderates like Sens. Joe Manchin, D-W.Va., and Kyrsten Sinema, D-Ariz., on board, Schoening said.

The bill also must get through the House of Representatives, where Democrats hold a three-seat majority.

Burke hopes the doing away with the SALT limitation survives congressional negotiations.

“The SALT cap has a far-reaching effect on an annual basis that a lot of my clients can take advantage of it’s lifted,” Burke said.