The Republican-led Tax Cuts and Jobs Act of 2017 limited the amount of state and local taxes that households can deduct each year from their federal income tax to $10,000 – a cap U.S. Rep. Lauren Underwood, D-Naperville, hopes to undo with new legislation.
The tax law went into effect in 2018.
In a Zoom news briefing Wednesday, Underwood detailed her legislative efforts to increase the cap from $10,000 for an individual or married couple to $15,000 for each individual filer.
“When Republicans enacted their tax law, many middle class Illinois families saw their tax burden skyrocket due to the new cap on state and local tax deduction – or SALT,” Underwood said. “This is real money with a real impact on families in our communities. It’s the money to put food on the table, or pay the mortgage, or save for a child’s college education.”
Underwood said she and U.S. Rep. Sean Casten, D-Downers Grove, introduced the SALT Fairness for Working Families Act to dial back the loss not only to constituents, but its financial impact on school districts and municipalities.
It would not only increase the current cap on SALT deductions, it would “eliminate the marriage penalty from the Republican tax law by allowing married couples, who file jointly, to double their deduction up to $30,000,” Underwood said.
“This would allow the vast majority of middle-class workers in northern Illinois to once again deduct their full SALT amount,” Underwood said. “My plan would also adjust the SALT cap for inflation, so the value of the deduction does not decrease over time.”
SALT deduction dates back to 1913
Until the Republican tax law limited SALT deductions, taxpayers had been able to deduct them without a cap since 1913, Underwood said.
Revenue from state and local taxes also supports investing in education, first responders, libraries and other services, she said.
“Right now, Congress and the country are debating how to reform our tax codes to be fairer, to better support families instead of corporations and the wealthiest among us,” Underwood said. “Changing the Republican tax law’s harmful changes to the SALT deduction is vital to this effort, so that middle class families no longer shoulder this unfair burden and our communities are not punished for investing in essential services.”
Underwood said increasing the corporate tax rate and increasing tax enforcement would cover federal revenue lost by increasing the tax deduction.
The Joint Committee on Taxation projected that repealing that SALT cap for tax year 2019 would increase federal revenues by $77.4 billion.
“That’s how you pay for this opportunity to help working class families as we recover from a devastating pandemic and economic crisis,” Underwood said.
Impact of losing deductions
Underwood invited Chuck Sullivan, president of the Associated Firefighters of Illinois, Ami Mantalbano, representing the Illinois Federation of Teachers and Diane Chapman, representing the Illinois Education Association, to talk about the impact of limiting state and local tax deductions.
Sullivan said limiting SALT deductions increases tax liabilities and puts financial stress on municipalities charged with providing public safety.
“Our members’ jobs protect the citizens and property in their communities through local taxes that are levied at a fair rate,” Sullivan said. “So what the SALT deduction now capped at an arbitrary – and quite frankly unfair level – both citizens and local governments suffer. ... By capping the SALT deduction, Congress … has made it more difficult for local governments to maintain or raise adequate revenue and public safety is often one of the first sectors to be reduced when facing a budget dilemma.”
Consider a taxpayer in the 28% tax bracket who is taxed $1 more in state or local revenue, he said. The overall tax rises by 72 cents because the remaining 28 cents can be deducted, Sullivan said.
“The unfair SALT cap … results in double taxation of the working class Americans and it really shouldn’t be the job of Congress to interfere with the statutory rights of state and local governments to develop and operate their own tax system,” Sullivan said. “Your fire departments rely on this funding.”
High taxes a barrier to homeownership
In explaining her support for raising or eliminating the SALT deduction cap, Montalbano said high property taxes are a barrier to home ownership.
“The cost of owning a home seems affordable – until you look at the taxes,” Montalbano said. “The SALT deduction incentivizes people like me to buy a home because I would then be able to claim my full state and local tax statement on my federal taxes.”
Montalbano said property owners would be less likely to support local referendums if they cannot claim the increase as a deduction on their income tax.
“The whole reason this came about was to partially to pay for President Trump’s and Republicans’ tax cuts for the wealthy in 2017,” Montalbano said. “Our federal government needs to focus on taxing the billionaires and millionaires rather than nickel-and-diming the middle class.”
SALT supports public education
Chapman said with public education vital to the nation’s future, limiting the SALT deduction means less funding for public education.
When taxpayers see what they are losing in deductions, they may not be so willing to approve $100 or $200 in a property tax increase to support a school referendum, Chapman said.
“I looked at my taxes for last year – and I’m a retiree and I’m on a fixed income – so there was a difference for me of over $1,100,” Chapman said. “That might not seem like that much to someone who is living in the 1% of wealth in our country, but to working families and retirees, that’s a huge amount. This SALT cap is impacting our ability to spend money on other things.”
In 2016, the average family in the 14th District – which includes portions of Lake, McHenry, Kane, DeKalb, Kendall, Dupage and Will counties – earned $100,000 to $200,000 and had an average SALT burden of $12,450, Underwood said.
“The bill also benefits – obviously – families earning more than $200,000 per year who pay an average of $28,757 in SALT in 2016,” Underwood said. “We believe that this is the solution that helps the most families in our community.”
Different views on SALT
According to the Urban-Brookings Tax Policy Center website, taxpolicycenter.org, lifting the SALT cap would favor the rich “with most of the benefit going to the top 1%.”
It urged that that the SALT deduction be eliminated because 75% of the benefits go to families in the top fifth income, according to its website.
But, the Government Finance Officers Association website, gfoa.org, sees the SALT deduction as “a partnership between the federal government and state and local governments.”
“The deduction is fundamental to the way states and localities budget for and provide critical public services, and a cornerstone of the U.S. system of fiscal federalism,” according to the website. “It reflects a collaborative relationship between levels of government that had existed for over 100 years. The SALT deduction was an accepted part of the tax structure that was critical to the stability of state and local government finance.”
Also, taxpayers avoid being taxed twice on the same income if they can deduct state and local taxes, the website states.
“Additionally, the deduction on property taxes, along with deduction on mortgage interest, provides a strong incentive for homeownership,” according to the website.
In a report on the impact of the SALT cap, the Illinois Municipal League did find that residents of wealthier communities would be impacted with higher federal taxes, according to its website, ilm.org.
“For the 671 municipalities that will be affected, the estimated average increase of federal income tax liability would be over 8% for 234,000 affected filers in 100 municipalities,” the league’s report stated. “About 32,000 taxpayers in 15 municipalities would see an increase of more than 10%.”
The league used IRS data of individual income tax statistics for the 2017 tax year.
In Campton Hills, for example more than half of 2,743 tax filers would pay 9.2% more in federal taxes.
In Geneva, 43% of the 4,747 filers would pay 8.8% more in federal taxes.
Almost the same percentage of Lily Lake filers, 188, would pay 9.1% more in federal taxes.
More than a third of the 998 filers in Elburn would pay 9.1% more.
More than 36% of the 7,782 filers in Elmhurst would pay 8.3% more in federal taxes.
In Wheaton, a third of the 8,592 filers would pay 9% more in federal taxes.
In La Grange, nearly a third of the 2,365 filers would pay 8.4% more in federal taxes.
In Glen Ellyn, the league estimated that nearly 39% of 5,275 tax filers would pay 9.3% more in federal taxes.