House agenda: Social Security, SALT deduction cap

Tax Hot Topics newsletter House Democrats are expected to turn their attention to Social Security taxes and at least a partial repeal of the cap on the state and local tax (SALT) deduction in the coming weeks.

While neither proposal is likely to pass the Republican-controlled Senate, even in exchange for action on tax items important to Republicans, they offer Democrats an opportunity to continue messaging their priorities ahead of the 2020 election. They also offer a preview of changes Democrats could pursue if they gain control of Congress and the White House.

The House Ways and Means Committee could mark up the Social Security 2100 Act (H.R. 860) as early as next month. The bill seeks to extend the solvency of the Social Security program with tax increases while increasing benefits and offering tax relief for recipients. In its 2019 Annual Report issued in April, the Social Security Board of Trustees projected its reserves would be depleted by 2035, after which the program would only be able to cover 80% of scheduled benefits.

Specific changes include raising benefits for all recipients by 2% on average, refining the annual cost-of-living adjustment formula and setting the minimum benefit at 25% above the poverty line and tying it to wage levels. Benefits would be taxed only if non-Social Security income exceeds $50,000 for individual recipients or $100,000 for couples, up from $25,000 and $32,000 respectively.

The bill proposes to pay for these changes by gradually raising payroll contributions on employees and employers from 6.2% to 7.4% over 23 years. It keeps the Social Security tax wage cap, currently set at $132,900, in place, but applies the tax again on wages above $400,000. Income that falls between that range does not get taxed.

Although 210 Democrats have co-sponsored the legislation, it currently has zero support from Republicans. At a Ways and Means hearing in July, Republicans largely acknowledged the need to address Social Security, but decried the Democrats’ approach, labeling it a regressive tax on workers and small businesses. Some Democrats also echoed these sentiments, but the bill is likely to pass if it reaches the House floor.

Democrats also appear close to coalescing around a plan to suspend the $10,000 limit on the SALT deduction enacted by the Tax Cuts and Jobs Act (TCJA) for three years. The cap has been wildly unpopular among Democrats and even some Republicans from high-tax states. Numerous proposals have been introduced to address it, including repealing it outright, raising it and tying it to inflation and keeping it in place but exempting certain taxes.

Republicans have been critical of efforts to repeal the cap, citing the more than $500 billion price tag. Many of the current proposals offer no revenue offsets or contain revenue raisers, such as raising the top individual rate back to 39.6%, that are generally non-starters for Republicans. Other critics have pointed to a report by the Joint Committee on Taxation that estimates repealing the cap would overwhelmingly benefit wealthy taxpayers, with over half the benefit going to taxpayers earning more than $1 million annually. A temporary suspension of the cap appears to be a compromise for Democrats. It would make offsetting the lost revenue more manageable while imposing a deadline that could pressure a future Congress to extend the suspension. The cap, along with all of the individual provisions enacted by the TCJA, are set to expire at the end of 2025.

Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T +1 202 861 4143

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