WASHINGTON – A decimated tax deduction most Americans never used (but many Minnesotans did) has become an obstacle as Congress tries to craft a $5 trillion extension of Donald Trump’s tax cuts.
Trump’s tax cuts were implemented during his first term and are set to expire at the end of this year. To help pay for those tax cuts, the deductibility of state and local income taxes (SALT) on federal tax returns was capped at $10,000 for individuals and $20,000 for married couples filing jointly.
That means taxpayers were limited in taking the deduction for state income taxes, property taxes and other local taxes. That hurt taxpayers in states with a high cost of living, high incomes and high taxes — mainly the nation’s “bluest” states.
According to the Tax Foundation, California was the state most affected by the SALT cap, followed by New York. While most other SALT cap-affected states were also coastal, Illinois came in at No. 3 and Minnesota was the other Midwestern state whose taxpayers were most disadvantaged by the cap, coming in 13th on the list.
Now the fate of Trump’s tax breaks may rest on whether the GOP can find common ground on the SALT cap because Republican House members from New York, California and other predominantly Democratic high-income states are demanding the limitation be lifted.
A hardcore group of these lawmakers nicknamed the “Salty Five,” who represent swing districts, say they won’t vote for Trump’s “big, beautiful (budget) bill” unless the cap is eliminated. That could scuttle the legislation in the narrowly divided U.S. House since no Democrat is expected to vote for the budget.
In addition, Trump has told New Yorkers he’ll address the SALT cap, including it on a long list of campaign tax promises.
Most American taxpayers don’t pay enough in state and local taxes to be bothered by the cap. And anti-SALT tax Republicans view them as a subsidy for high-tax states that encourage keeping local taxes high.
There’s talk of a compromise. GOP House leaders who met often with the rebellious moderates this week say lifting the cap a little — to $30,000.
But four New York Republicans said that was woefully inadequate, especially since New Yorkers pay more in taxes than they receive back from the federal government, as most higher income states do, including Minnesota.
“We’ve negotiated in good faith on SALT from the start — fighting for the taxpayers we represent in New York,” Reps. Elise Stefanik, Andrew Garbarino, Nick LaLota and Mike Lawler said in a statement. “Yet with no notice or agreement, the Speaker and the House Ways and Means Committee unilaterally proposed a flat $30,000 SALT cap — an amount they already knew would fall short of earning our support.”
The SALT cap prompted Gov. Tim Walz to do what other governors in blue states have done — approve a workaround that allowed some tax filers (partnerships, single proprietorships and S corporations) to fully deduct state taxes as a business expense.
In any case, the SALT cap, coupled with the increase in the federal standard deduction that Trump implemented as part of his tax cut plan, has changed the way many Minnesotans file their federal taxes.
Eric Willette, research director at the Minnesota Department of Revenue, said that before the 2017 tax bill took effect, 35% to 40% of Minnesota taxpayers itemized their deductions. Now, only about 6% to 10% do.
If the SALT cap were lifted, those numbers could change, Willette said.
“There are a lot of people who would go back to itemizing, but not as many as there used to be,” Willette predicted.
Medicaid woes lead to blown deadline
It’s likely House Speaker Mike Johnson, R-La., will miss his Memorial Day deadline to pass a mega-budget bill that would renew Trump tax cuts, and cut federal programs to help pay for them.
The speaker’s biggest problem is the differences among Republican House members on the best way to cut money from Medicaid. Johnson met behind closed doors with groups of moderates and conservative hardliners this week to try to find common ground, and that largely eluded him.
Cuts to the government health care program for the poor and the disabled were considered essential because the Energy and Commerce Committee, which has jurisdiction over Medicaid, was tasked with finding $880 billion in savings and other large programs the panel oversees — Social Security and Medicare — were considered off the table.
But House GOP moderates are warning Republican leaders that they could lose their seats — costing the GOP its House majority — if there are deep cuts to Medicaid.
Meanwhile, House conservatives are demanding that the program be dramatically shrunk.
If either group withholds their support, they would derail GOP plans to present Trump with a budget bill that advances his agenda.
House Republicans could only agree on one thing when it came to finding Medicaid savings — requiring beneficiaries who are not disabled or aren’t caretakers of small children or the elderly or a student to prove they are employed in order to keep their benefits.
But those work requirements would not reduce spending on the program nearly enough.
So, House GOP leaders are considering another way for the House Energy and Commerce Committee to meet its obligation to cut hundreds of billions of dollars in health care costs: requiring pharmaceuticals to lower Medicaid drug prices, an idea Trump is promoting.
House Republicans will continue to meet over the weekend to work on an Energy and Commerce bill the panel hopes to consider Tuesday afternoon.
In case you missed it:
-Speaking of Medicaid, state government reporter Matthew Blake wrote about Medicaid’s history in Minnesota and data reporter Shadi Bushra explained how the system works in the state.
-Matthew Blake wrote a piece on how Republicans in the state Legislature are demonizing Minnesota’s decision to subsidize health care costs for undocumented residents, even though the program accounts for a tiny fraction of the state budget.
-Winter Keefer had a story about how a downturn in new housing in St. Paul has forced the city to take a second look at its rent-control policies.
-We also wrote about the House Committee on Natural Resources section of Donald Trump’s “big, beautiful (budget) bill,” which would remove a mining moratorium on the Boundary Waters watershed and expedite federal mining permits.
-And in Community Voices, a professor emeritus argues for a close examination of how the Trump administration defines people and situations to its benefit.
Your questions and comments
A reader was kind to thank MinnPost for a story about legislation approved by the House Natural Resources Committee that boosted mining prospects in the watershed for the Boundary Waters.
“Greetings from Billings, Montana!” the reader wrote. “I read your article in the Post from two days ago: concerning the revocation of protections of the Boundary Waters in Minnesota. Thank you for sounding the alarm! I am a Minnesota native, care deeply for my home state, and would like to notify my congressman in Montana, Troy Downing (R), to oppose this legislation.’’
Another reader reacted to a story about the avalanche of lawsuits filed against the Trump administration in its first 100 days.
“Most of the lawsuits that are going against Trump appear to violate his oath of office, particularly ignoring court orders” the reader wrote. “It would be interesting to consider what consequences he could or should experience for this. He was elected president, not dictator.”
Please keep your comments, and any questions, coming. I’ll try my best to respond. Please contact me at aradelat@minnpost.com.
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