Members of the House Freedom Caucus have an idea for lawmakers from California, New Jersey and New York seeking to expand a key tax deduction in negotiations over a sweeping GOP policy bill: We’ll trade you lower taxes on your constituents for higher taxes on your companies.
Under the proposal, blue-state Republicans would have to agree to restrict the state and local tax deduction — commonly known as SALT — for corporations in exchange for easing a cap on the deduction for individuals and families.
“I think a lot of us in the Freedom Caucus think that … if they came to that kind of compromise where increasing individual [state and local tax] deductions was paid for by corporate SALT, then we’d probably be all right with that,” HFC Chair Andy Harris (R-Md.) said in an interview. “Obviously, in the current fiscal situation, we can’t be giving away money.”
The idea is not going over well with so-called SALT Republicans who are negotiating with the tax-writing House Ways and Means Committee to increase the deduction for individual taxpayers. They aren’t up for “trading one blue-state penalty for another,” said a lawmaker participating in the discussions, granted anonymity to discuss the private deliberations.
The back-and-forth is emblematic of the challenges lawmakers face in coalescing around a sweeping border, energy and tax package — which House Speaker Mike Johnson (R-La.) is now pushing with an aggressive timetable to get a full floor vote by April. Both the SALT Republicans and the House Freedom Caucus have tremendous leverage in the House given the GOP’s slim majority.
A coalition of New Yorkers from critical swing districts, in particular, have vowed to block any tax bill that doesn’t include an increase in the $10,000 cap on the SALT deduction for individuals and families. But doing so would be very expensive and is otherwise widely unpopular with most of the GOP conference.
Many Republican lawmakers insist that a SALT cap increase would have to be paid for by spending cuts or tax hikes elsewhere.
“Look, it’s going to take a lot of debate on that. It’s tricky. That’s why it’s going to be hard to meet that deadline for the tax part,” said HFC member Ralph Norman (R-S.C.), when asked about ongoing negotiations over SALT, in an interview.
Senate Finance Committee Chair Mike Crapo (R-Idaho), the lead tax negotiator in the Senate, acknowledged negotiators are currently working through possible SALT trade-offs.
“There are people on both sides of those issues,” Crapo told reporters. “That’s one of those issue sets that’s a very hard one to resolve.”
The idea floated by the HFC would be a tax hike on many companies operating in New York, New Jersey and California, like Alphabet, American Express and Chevron, among many others, even as the majority of the Republican Conference has indicated it is not in favor of raising the 21 percent corporate tax rate.
Under current law, companies can deduct an unlimited amount of state and local taxes from their federal taxes. Just ending their ability to deduct their state corporate income taxes would raise $192 billion in revenue over ten years, according to a joint analysis by the Bipartisan Policy Center and the Tax Foundation.
Limiting companies’ ability to deduct state property taxes could raise hundreds of billions more, according to the Tax Foundation’s Garrett Watson.
“Would Republican members be comfortable raising taxes on corporations and businesses in this way because they are not in favor of raising the [corporate] rate?” Watson said.
Eliminating the SALT cap for individuals would be hugely expensive — $1.2 trillion over ten years, the Committee for a Responsible Federal Budget has estimated.
Doubling the SALT deduction cap for married couples who file jointly — another idea under consideration — would cost about $225 billion over ten years, according to Howard Gleckman, an analyst at the Tax Policy Center. That assumes Republicans also extend dozens of other tax provisions set to expire at the end of the year.
It’s not clear, though, if the SALT Republicans themselves can agree on an “ask” for how much to lift the cap, even as President-elect Donald Trump, in a meeting with them last weekend at Mar-a-Lago, reaffirmed his commitment to raising it. Trump told them to negotiate a “fair number.”
“I haven’t been in obviously every one of the meetings, but it’s changed pretty much every meeting,” Republican Policy Committee Chair Kevin Hern (R-Okla.) said in an interview, referring to his experience fielding SALT requests from the New Yorkers.
Republican Conference Vice Chair Blake Moore (R-Utah), who met with New York Republicans on SALT last week, said in an interview that, “in a perfect world,” SALT Republicans would be on the same page right now.
However, there are “realities” in every state that negotiators are working through, Moore said.
It’s an issue that Republicans will have to find consensus on soon, given that Speaker Johnson has laid out a plan to finalize a budget resolution by Feb. 10 — a necessary step in kicking off budget reconciliation, which would be used to circumvent Democratic opposition in the Senate on key Republican policies.
The budget resolution will contain the instructions for committees on how much they can spend on policies within their jurisdiction. And House GOP leaders privately say that, without an agreement on SALT, they can’t properly plan for how big the package will be and how much spending they need to cut.
House Ways and Means Chair Jason Smith (R-Mo.), who’s spearheading the GOP’s tax bill, told POLITICO that he’s confident negotiators can find a way forward.
“We will, as a Republican conference, all get on the same page,” Smith said in an interview.
Meredith Lee Hill contributed to this report.