SALT in the gears: Amending the Tax Cuts and Jobs Act

If no legislative action is taken, most of the individual provisions within the 2017 Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025, increasing taxes for many individuals. While the new Trump Administration has expressed its commitment to preventing the TCJA’s expiration – and likely has congressional support – much horse-trading between members of Congress and the new Administration must happen over the coming weeks and months to secure its extension.

Your clients will likely hear about what may or may not happen during these negotiations. To equip you in addressing client concerns and inquiries, we’ve compiled a list of frequently asked questions related to the TCJA expiration.

1. Can’t the President just change the tax code himself? Like through an Executive Order?

No. He will need the support of the House of Representatives and the Senate. He cannot do it alone. While Republicans have the majorities in both the House and Senate, these majorities are extremely thin. In the House, it is the narrowest majority in nearly 100 years, with 220 Republicans / 215 Democrats or 50.6% Republican and 49.4% Democrat in percentage terms. If you consider the three Republican House members who resigned (M. Gaetz) or have been nominated to join the new Administration (Stefanik, Waltz), the count drops to 217 Republicans /215 Democrats. That means Republicans cannot afford to lose a single vote, which makes each member’s vote a potential swing vote. This is the definition of legislative power. The Senate is only marginally better at 53 Republicans / 47 Democrats. But both are majorities.

2. Can this narrow majority extend the TCJA as is? Just pass the new bill along party lines and call it good?  

It’s not that easy. To pass permanent tax changes, you need two-thirds approval from both the House and the Senate. It seems unlikely the needed number of Democrats would vote for the extension. This hurdle will bring the Republican-controlled Congress to turn to the Budget Reconciliation Process.

3. What is the Budget Reconciliation Process?

This expedited legislative process allows for certain tax, spending, and debt legislation to be passed with a simple majority vote (not the two-thirds hurdle for permanent changes), making it a more feasible option given the current political landscape. The Budget Reconciliation Process has been used most frequently when the same party controls the presidency, House, and Senate, but lacks the 60-vote majority in the Senate. It cannot be filibustered – making the final bill easier to bring forward for a yes or no vote.

However, the Budget Reconciliation Process has its limitations. Bills passed via reconciliation can’t raise the deficit beyond pre-determined top-line revenue and spending targets. Any proposed bill can’t cost more than these targets. And these costs are usually estimated over a set time period – often 10-years following the passage of the bill. Any costs above these cost targets must be offset with equal amounts of revenue. This is why the TCJA “sunsets” on January 1, 2026. It was passed through budget reconciliation in December 2017.

4. What are the estimated costs to extend the TCJA as is?

Most economists project that the extension of the TCJA as is will cost $3+ trillion over 10 years. That is a long way from being “deficit neutral.”  The exhibit below includes economists from both sides of the debate estimating the budget impact. The new Administration must find ways to offset much of these anticipated costs to include looking at tariffs, changes to futures spending related to the prior Administration policies and other spending reforms.

5. Why is SALT in the name of the blog? What’s the deal?

One of the provisions in the TCJA was to limit taxpayers’ ability to deduct State And Local Taxes (SALT) from their taxable income with the deduction amount capped at $10,000. Oddly, the $10,000 available deduction is the same for taxpayers filing Married Filing Joint (MFJ) or Single, which makes no sense.

This cap effectively raised taxes on many taxpayers who pay high state taxes, local taxes, and property taxes. What was once a significant deduction is now capped at $10,000. Some argue that savings from lower tax rates offset the impact from SALT, but perception is reality. It should be no surprise that those taxpayers are not happy—and by extension—their elected members of Congress are not happy.

The SALT cap was a key provision (revenue raiser) used to help achieve needed budget targets back in 2017 when the TCJA was passed. Lifting or raising the cap goes the wrong direction for finding revenue offsets in extending TCJA. The Penn Wharton Budget Model estimates extending SALT in its current form would add approximately $1.1 trillion over the next 10 years. That is a big number for sure.

6. So, what’s next? 

Let the horse-trading begin! The narrow majority in the House gives each member of Congress a strong voice in trying to get their favorite part of the tax code changed or implemented. Keep your eyes open for negotiations around the SALT limit. It is a great example of the friction resulting from campaigning on policy changes with the reality of the budget numbers.

It’s likely that some type of extension of the TCJA will happen in 2025. But what the final version looks like will be interesting to see.

7. What should you tell your clients?

Your clients will likely see lots of news stories about tax reform. You can inform them that:

• The President can’t pass any changes alone. He will have to work closely with very narrow majorities in both the House and Senate.
• Regarding tax rates that investors pay on their investment income, the conventional wisdom today is that the rates will likely be extended.
• Some of the underlying parts like the SALT deduction, Section 199A deduction, Standard Deduction may reflect changes from the code today.

Remember, long-term investors want tax reform written in ink, but the reality is that these changes are too often written and passed in pencil.