Senate Fails to Overturn Cap on State and Local Tax Deductions

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Senate Fails to Overturn Cap on State and Local Tax Deductions

As part of the Trump tax cut bill, many taxpayers got a tax cut. Some, however, saw their tax deductions limited. This was especially true for high-income taxpayers, who saw a cap on their ability to deduct state and local taxes. A move in the Senate to allow states to do an end-run around this cap was defeated this week.

 

Prior to the Trump tax cuts, taxpayers could deduct the full amount of their state and local taxes. While theoretically available to all taxpayers, it generally benefited taxpayers with higher incomes (who are more prone to use itemized deductions rather than the standard deduction) and those who lived in states with higher taxes.

 

The Trump tax bill limited this state-and-local tax deduction to $10,000. In other words, if someone paid $17,000 in state and local taxes, they could only deduct $10,000 instead of the full $17,000. This upset some state officials, especially those who represent states that have a large share of high-income taxpayers paired with high state tax rates.

 

In response, some states passed laws that were an attempt to circumvent this cap. These generally involved classifying taxes in certain circumstances as charitable contributions. Since the tax bill still allowed full deductibility of charitable contributions, this would have allowed these state taxpayers to skirt the state-and-local deduction cap.

 

The Treasury Department issued a rule that essentially invalidated these state laws for federal tax purposes. Sen. Chuck Schumer, who represents New York, introduced Senate Joint Resolution 50 to disapprove of this Treasury regulation. If passed, the effect of this disapproval resolution would to be allow states to pass laws that circumvent the tax cap, essentially repealing it on a state-by-state basis.

 

The full Senate did not agree with Sen. Schumer, however. On Wednesday, the resolution failed by a vote of 43-52. The vote was largely along party lines, with only Republican Rand Paul voting for the resolution and Democrat Cory Gardner opposing it.

 

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