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Democrats look at expanding minimum tax on wealthy in exchange for state and local tax break

Revised alternative minimum tax could offset some of the huge savings wealthier Americans would win for proposed SALT change

Rep. Josh Gottheimer (D-N.J.) speaks to a reporter as he arrives for a meeting with House Democrats on Capitol Hill on Oct. 26, 2021. (Andrew Harnik/AP)
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Senior Democrats are weighing expanding a new minimum tax on upper-income households in exchange for repealing a limit on state and local tax deductions created by the 2017 Republican tax law, according to three people familiar with the negotiations.

Democrats in high-tax states such as New Jersey, California and New York have demanded the repeal of a $10,000 cap on what state and local taxpayers can deduct off their federal taxes, a provision enacted by the GOP in their tax law to offset the cost of its large corporate tax cut. Lawmakers such as Rep. Josh Gottheimer (D-N.J.) have gone as far as saying they will vote against President Biden’s Build Back Better economic package if repeal of the “SALT cap” is not included (SALT is an acronym for the state and local tax deduction).

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These demands have faced criticism from tax experts on the left, right and center, who say allowing Americans to deduct potentially hundreds of thousands of dollars in state and local taxes from their federal income would amount to a substantial benefit for the wealthiest taxpayers in the most high-tax parts of the country.

But senior Democratic leaders have eyed pairing the repeal of the SALT cap with an expanded “alternative minimum tax,” which was effectively gutted by the 2017 GOP tax law, the people familiar with the negotiations said. That would at least partially mitigate the amount that the rich would benefit from the repeal of the SALT cap. The AMT was supposed to prevent people from piling up so many tax deductions that they virtually eliminate all of their tax liability.

One person close to the negotiations said the minimum tax requirement and SALT repeal would “travel together,” meaning one would not pass without the other. The people familiar with the negotiations spoke on the condition of anonymity to reflect private deliberations.

Gottheimer, one of the most ardent supporters of repealing the SALT cap, has repeatedly said its existence hurts states and localities in Democratic parts of the country by depriving their state and local governments of revenue. Democrats are planning to reinstate the deduction for five years, making the benefits retroactive from its repeal to 2021, according to a congressional aide familiar with the negotiations.

“Today’s news is encouraging for a SALT cap repeal to be included in the final reconciliation package,” Gottheimer said in a statement. “No SALT, no deal.”

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Condemnation of the push to repeal the SALT cap came Tuesday from both conservative and liberal tax experts.

People earning $50 million to $300 million per year would probably get a tax cut overall from Biden’s economic package if the SALT cap is fully repealed, said Jason Furman, an economist in the Obama administration, who called its inclusion “obscene.” Furman acknowledged there are other new tax measures could mitigate the impact of the benefit for the rich, and he did not factor in the reimposition of the AMT to his calculations.

Senate Budget Committee Chairman Bernie Sanders (I-Vt.) also released a statement strongly opposing the repeal of the state and local tax deduction for the rich. Sanders cited nonpartisan estimates finding full repeal could cost $475 billion — nearly a quarter of Biden’s overall spending package — while awarding $400 billion to the richest 5 percent.

“The majority of benefits from repealing the SALT cap just go to the 1 percent,” said Steve Wamhoff, a tax expert at the Institute on Taxation and Economic Policy. “If BBB [the Build Back Better legislation] is amended to include that, we could be looking at a bill that cuts taxes for a lot of rich people — which is the opposite of what we’ve been led to expect.”

It remains unclear exactly what Democrats are considering for the new alternative minimum tax. Republicans reduced the minimum tax in their 2017 law in part because it was not as necessary with the limits on state and local tax deductions. If the new minimum tax is only somewhat broadened, tax experts say, repealing the state and local deduction cap could still be a major windfall for the wealthy.

Some Democratic lawmakers have eyed reimposing the SALT cap in 2025 as part of the Build Back Better package, arguing this will help them offset the cost of its retroactive repeal. But many tax and budget experts regard that strategy as a budget gimmick, because the Democrats are expected to push for its repeal after 2025 as well when the changes are set to expire.