These N.J. Democrats have their own demands for their party’s big bill, and yes, it’s about property taxes

WASHINGTON — There’s another obstacle awaiting President Joe Biden’s major social spending bill, and it’s coming from New Jersey Democrats.

As the party wrangles over the size, scope, and strategy for passing much of Biden’s economic agenda, some New Jersey Democrats are insisting that it include tax relief that could help hundreds of thousands of Garden State residents.

Both New Jersey senators and several of the state’s Democratic House members are pressing for any final bill to include a restoration of the State and Local Tax Deduction, a valuable write-off that was capped in the 2017 Republican tax bill.

With Democrats unable to lose even a single Senate vote and only three House votes to advance their plans, the threats to defect give the New Jerseyans leverage on an issue they’ve been pressing for years. The write-off allows individuals and families to deduct the state and local taxes they have paid when they file their federal taxes; the deductions reduce the amount of taxable income.

New Jersey residents, facing notoriously high property taxes, have historically been one of the country’s biggest beneficiaries. The average deduction statewide was $19,000 before the GOP-led tax law put a ceiling on the deduction. In 2018, that dropped to $9,700.

Sen. Bob Menendez (D., N.J.) has said it would be “hard” to support a final Democratic spending bill unless there is a full repeal of the $10,000 limit on state and local tax deductions.

“The full deduction of state and local taxes is common sense tax policy that incentivizes states to invest in education, public safety, essential services, and other job-creating initiatives that create economic opportunity for all,” Menendez said in a statement last week. Referring to the break by its acronym, he added, “No SALT, no deal.”

Lawmakers from New York, including the Senate’s top Democrat, Chuck Schumer, have also called for restoring the full deduction. House Speaker Nancy Pelosi (D., Calif.) has described the cap as “devastating” to taxpayers in her home state.

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But the cap is just one piece of the tangled negotiations over a sprawling social spending bill that so far have focused on resistance from Sens. Joe Manchin (D., W.Va.) and Kyrsten Sinema (D., Ariz.). It’s unclear if party leaders will side with the New Jersey lawmakers when the final bill arrives.

And the New Jerseyans face an array of opposition. Republicans argue that the deduction encourages liberal governors and mayors to raise taxes, since their residents are shielded from some of the ultimate cost. Conservatives also often criticize the deduction as a subsidy for people in states that have high taxes. And balanced budget advocates and some progressives and Republicans also point out that the deduction is overwhelmingly weighted to aid the wealthy.

“The inconvenient truth for House Democrats is eliminating or raising the SALT deduction cap forces people of middle and low income to subsidize high-income people who choose to live in high-tax jurisdictions,” said Sen. Pat Toomey (R., Pa.), a key author of the tax bill that limited the deduction.

He argued it would be better to lower individual tax rates, as that 2017 bill did, paid for in part by capping the SALT deduction.

Some Democrats, meanwhile, argue that the money the government would lose by restoring the break could be better spent on other priorities in the social spending bill, which covers health care, child care, education, and other safety net concerns.

Estimates for fully restoring the deduction range from around $75 billion to $85 billion per year. By comparison, extending the enhanced Child Tax Credit Democrats approved earlier this year costs about $110 billion per year, according to the nonpartisan Committee for a Responsible Federal Budget. That credit is expected to largely benefit people with lower incomes.

With so much at stake for their party in the social spending bill, which contains vast swaths of Biden’s agenda, it’s unclear exactly how far the New Jersey Democrats will push. Many of their threats to withhold their support have been couched.

Sen. Cory Booker told a New York radio station that the deduction “is something I’m willing to go to the mat for.”

Four House members have threatened to oppose a final Democratic bill unless it offers some relief. Their four votes would be enough to stall the bill.

“The fact is, restoring SALT is restoring the middle class,” said one, Rep. Bill Pascrell, in a statement. His spokesman said the congressman won’t support the broad spending plan if it “does not provide meaningful SALT relief.”

Yet liberal and conservative analysts both point out that the vast majority of the deduction benefits go to wealthy taxpayers. If the cap was lifted, nearly 83% of the benefits would go to people in the top 5% of the income scale, according to a 2018 analysis by the liberal-leaning Tax Policy Center.

About 4% of the benefits would go to taxpayers in the bottom 80%.

Rep. Alexandria Ocasio-Cortez (D., N.Y.) has called the break “a giveaway to the rich.”

In New Jersey, nearly 755,000 tax filers claimed the deduction in 2018, according to the most recent IRS data available, a steep drop from before the cap was implemented, though there were many tax changes that could have contributed to that, including an increased standard deduction.

The year before the new cap took hold, around 80% of the value of deductions in New Jersey was claimed by filers making $100,000 or more. A little more than half was claimed by those with incomes of $200,000 and up.

Even though Pennsylvania is far larger, fewer of its taxpayers claimed the deduction in 2018 (551,000 filers), deducting around $8,300 of income on average. The benefits were largest in wealthier areas, such as Chester and Montgomery Counties.

Proponents of the benefit say it avoids “double taxation” by preventing the federal government from taxing money that people have already paid to fund their state and local governments. And they argue that income comparisons don’t factor in the high cost of living in places like New Jersey.

Democratic aides also argued that the wealthy aren’t the only ones who benefit: More than 500,000 New Jersey filers who claimed the deduction in 2018 earned less than $200,000.

“Middle income in New Jersey is not the same as in Tulsa, Oklahoma, Sioux Falls, South Dakota, or Casper, Wyoming,” Pascrell said in his statement. “We all know housing, food, childcare, and transportation costs are higher here.”

New Jersey Democrats argue that the 2017 change targeted the deduction to punish blue states where people pay more taxes to fund schools, infrastructure, and other public assets.

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Taxpayers in New Jersey, New York, and California — states with high costs-of-living — have historically been the biggest beneficiaries of the deduction, according to the Tax Policy Center.

Democratic aides also argued that New Jersey taxpayers already contribute far more to federal coffers than they get back in federal aid.

“This is about hardworking, middle-class families who are not being treated fairly,” Menendez said. “At the end of the day, we are a donor state that funds the programs that many moocher states rely on.”

In South Jersey, where the deduction is still popular but worth less on average than in North Jersey, Democrats support a restoration but have been less outspoken.

“SALT is incredibly important for New Jersey and I would expect it to be a part of the solution,” said a statement from Rep. Donald Norcross.

Rep. Andy Kim “fully supports restoring the tax deduction for hard-working families across New Jersey,” a spokesperson said.

As negotiations unfold, it’s unclear if the Democrats will hold out for a full repeal, or accept some partial measure. Since the cap is slated to expire after 2025, a temporary repeal might help achieve most of what they want. A partial repeal that raises the cap could provide some relief, though not as much as the New Jersey lawmakers want.