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Moderate Democrats want the $ 3.5 trillion spending plan to remove the limit on state and local tax deductions

Rep. Tom Suozzi, a Democrat from New York, speaks during a press conference announcing the state and local tax (SALT) caucus outside the U.S. Capitol in Washington, D.C. on Thursday, April 15, 2021.

Sarah Silberner | Bloomberg | Getty Images

A dispute over the cap on state and local tax deductions could be the Democrats' next hurdle as they pass their $ 3.5 trillion fiscal adjustment package.

A number of moderate Democrats – many from New York and New Jersey – have protested former President Donald Trump's tax cuts in 2017 for limiting how much state taxpayers can deduct from their federal tax liability.

New Jersey reps Josh Gottheimer, Mikie Sherrill, Bill Pascrell and Thomas Suozzi of New York say they will not support legislation that does not restore full state and local tax deduction known as SALT.

"We need this state and local tax deduction. We have a whole system built around it," said Suozzi, who has represented parts of Long Island and northeastern parts of Queens, New York since 2017. "People are leaving our states. And when they leave, it leaves a hole in our earnings."

"We are in competition with states that do not insure their children, do not pay their teachers, have no local transport and think climate change is a joke," he said. "And that means your costs are lower."

Trump's tax law limited SALT deductions to $ 10,000, meaning residents in higher-tax states like New York and New Jersey could no longer deduct the full value of their state tax liability from their federal bills. Before Trump's tax cuts, there was no limit.

While some politicians had left room to negotiate the upper limit, Sherrill reiterated their view that the limit should be abolished entirely.

"I really think a full repeal is needed here," Sherrill said in a telephone interview.

"Because I think this would not only help if we are trying to regain the New Jersey economy … but also that it is a value in our tax system," she added. "If we want to fund things like our teachers, our cops, and our schools through state and local taxes, don't stop the state."

Suozzi also wants a full repeal.

"I am completely against raising the cap. It would be a great political victory because it would help many people in my district and in many districts across the country," he said. "But it wouldn't address the political problem, namely that people are leaving our states. And that's bad policy for us."

Gottheimer, Sherrill, Pascrell and Suozzi represent affluent districts compared to the national average. Of the four, Pascrell is the only one who, according to the latest census data, represents a district with an average household income less than $ 100,000.

Some of their more progressive counterparts say lifting the cap would benefit the wealthiest American households disproportionately.

Alexandria Ocasio-Cortez, D-N.Y., MP said in April that the removal of the cap was "a giveaway for the rich". The progressive legislature stated at the time that it was open to "a discussion" about changes, but that a complete repeal would be an exaggeration.

Ocasio-Cortez represents a district with an average household income of $ 66,700, according to census data. Your office declined to comment on this story.

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Progressives also claim that a complete repeal would undermine their party's attempts to find ways to pay for President Joe Biden's ambitious political agenda. On Tuesday, when asked for comment, the White House referred CNBC to earlier statements by press secretary Jen Psaki that the government was open to discussions about the SALT cap.

But with Conservative Democrat Senator Joe Manchin insisting that Biden's $ 4.5 trillion spending, including the infrastructure bill, be paid in full, it's unclear how much of the additional federal revenue the White House would be willing to give to state funds and give up local governments.

Republicans have backed the SALT cap mainly to deter blue states from what they criticize as a lavish tax and spending model. The Democrats counter by pointing out falling crime rates, the prestige of public school systems, better access to affordable housing and other taxpayer-funded initiatives.

Whether the Democrats will enforce their demands for a complete repeal or be content with simply raising the ceiling remains to be seen and is expected to be negotiated in private talks with the leadership in September.

Congressional officials speaking to CNBC suggested that Democrats may be calling for a complete repeal but privately awaiting a satisfactory compromise that would raise the $ 10,000 ceiling. They spoke on condition of anonymity, to have fluent private discussions.

House Speaker Nancy Pelosi (D-CA) holds her weekly press conference at the United States Capitol in Washington, USA on August 6, 2021.

Evelyn Hockstein | Reuters

Yet any threat from within the party carries weight in a chamber controlled by a few votes. House Speaker Nancy Pelosi, D-California, needs to find a way to convince – or force – the members of her own caucus to vote for the $ 3.5 trillion bill and $ 1 trillion infrastructure legislation her party fought in 2020.

Republicans are united in their opposition to transformative laws intended for the first time in decades to rewrite the laws that underpin America's aging social safety net.

"The cap on the SALT deduction was a bleak Republican plan to double blue communities, not red, to stifle the revenue that high-cost advanced states and cities need to maintain services and meet the needs of their residents," Pelosi spokesman Henry Connelly told CNBC on Tuesday.

"Under the leadership of President Pelosi," Connelly continued, "the House of Representatives passed laws twice in the last Congress that included the double lifting of the SALT deduction, and the Democrats continue to work on a path forward for this important priority in the Atonement Act . "

Senate majority leader Charles Schumer, D-N.Y., Also supports lifting the SALT cap and offered moderate remarks on Wednesday.

"Many people in our caucus strongly believe that the SALT cap should be lifted and we are working towards that goal," he said during a press conference.

The remarks from the House speaker's office could be her strongest support yet for lifting the SALT cap and are likely a welcome addition to Gottheimer, co-chair of the Problem Solver Caucus.

“This struggle for a full reintroduction of SALT is existential for states like Jersey, whose taxes rose rather than fell under the Tax Increase Act of 2017. “He said on Tuesday evening.

Representative Josh Gottheimer, a Democrat from New Jersey, center, speaks during a press conference with the Solvers Caucus issue outside of the U.S. Capitol in Washington, D.C., the United States, on Thursday, December 3, 2020.

Stefani Reynolds | Bloomberg | Getty Images

Last month, Gottheimer and Pelosi argued over whether the chamber should pass the bipartisan infrastructure package first or prioritize the $ 3.5 trillion reconciliation plan.

Gottheimer noted that, according to New Jersey-based newspaper The Star-Ledger, a full reintroduction of the deduction would give almost a third of Garden State families, nearly 3 million people, a tax break.

"Eighty percent of these people make $ 216,000 or less," he said. "These are our teachers and firefighters. In high-cost states like ours, the point is whether middle-class families can or cannot afford New Jersey."

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