SALT Cap Comes Back to Haunt GOP With Key Tax Writers Losing Their Seats

(Bloomberg) -- At least six House Republicans in high-tax states lost their seats Tuesday, defeated in part by voter frustration over the GOP tax law's new cap on state and local tax deductions.

Two of the key players behind the tax overhaul -- Illinois' Peter Roskam and Minnesota's Erik Paulsen -- were among the six casualties. They sit on the tax-writing Ways and Means Committee, whose Republican bench has been wiped out by losses, as well as retirements.

Ten of the 24 Republicans on the Ways and Means Committee won't return to Congress next year -- in addition to Roskam and Paulsen, two members from low-tax states lost their re-election bids and six more decided to retire or run for other office. The loss of many of the committee's top lawmakers means the GOP will need to rebuild members' expertise in tax, trade and health-care issues.

[Explore state-by-state election results with Bloomberg's interactive map of the 2018 U.S. midterms.]

President Donald Trump blamed Roskam and Paulsen's losses on their decisions to distance themselves from him. “Peter Roskam didn't want the embrace, Erik Paulsen didn't want the embrace,” Trump said Wednesday during a press conference, where he listed other Republicans who were defeated because he said they didn't want his support.

Other high-tax state Republican losers on Tuesday include Claudia Tenney, a New York Republican, who lost her bid in an upstate district. She initially opposed the so-called SALT cap before eventually voting “yes” for the tax law. Even though New York's Dan Donovan and John Faso, and New Jersey's Leonard Lance voted “no” for the bill, it wasn't enough to deny the connection for voters between their party and the SALT limit.

Voter Frustration

Roskam and Paulsen helped craft the 2017 bill and continued to support it even after a controversial provision was included to limit deductions to $10,000. Previously, they were unlimited. The lawmakers had hoped campaigning on the tax law's other benefits, such as lower rates for individuals and more generous child tax credits, could offset voter frustration over the new cap.

The race for the seat held by Tom MacArthur, the only New Jersey Republican to vote for the tax law, is still too close to call. The average SALT amount for a New Jersey resident in 2015 was $17,850, according to data from the Pew Charitable Trusts. The New Jersey Star-Ledger editorial board cited the SALT change as a key reason for endorsing MacArthur's Democratic opponent, Andy Kim.

Read more about what Democrats are planning for the tax overhaul

The inclusion of the provision was a crucial trade-off for the tax law to comply with Senate budget rules. It effectively raised taxes on many middle and high earners in high-tax states, such as New York, New Jersey and Illinois.

Roskam, who served as the House Ways and Means tax policy subcommittee chairman during the tax overhaul process, hails from a suburban Chicago district where the counties are some of the highest taxed in the state.

About 49.3 percent of the tax returns filed in the district prior to the law change claimed the SALT deduction, according to data from the Urban-Brookings Tax Policy Center.

Roskam's Democratic opponent, Sean Casten repeatedly campaigned on eliminating the SALT cap. “The fact that nearly half of his own constituents claim this deduction didn't prevent Peter Roskam from making SALT a target,” Casten said in a white paper he published about tax policy.

Over the course of the campaign, Roskam softened his support for the SALT cap, saying it should be indexed to inflation.

Paulsen's Steadfast Support

For Paulsen, his suburban Twin Cities district is the wealthiest in Minnesota, and one of the hardest hit by the SALT changes.

His Democratic opponent, Dean Phillips, criticized Paulsen's steadfast support for the tax law.

Paulsen, as the chairman of Congress's Joint Economic Committee, has been responsible for touting the tax law's success, even as public support has waned and many economists say it's too early to definitely say the law is working. That gave Phillips an opening to paint Paulsen as a GOP follower that wouldn't use his position to advocate for Minnesotans.

Democrats, particularly those from high-tax Northeastern states, have said they want to use their new majority to increase or fully repeal the cap on the SALT deduction -- a pricey proposition. Removing the SALT cap would cost about $673 billion over a decade, according to estimates from the Tax Foundation. That would require, say, raising the corporate tax rate nearly four percentage points -- to 25 percent -- to offset the cost.

Repealing or increasing the cap on the SALT deduction is a high priority for those who represent districts in high-tax states, such as Representative Bill Pascrell of New Jersey and John Larson of Connecticut. Outside of those high-tax areas, it's less of a concern because most voters have SALT bills under the threshold.

Any substantive change to the SALT cap would likely need to come from Congress. The Internal Revenue Service issued regulations earlier this year invalidating attempts in high-tax states to create charitable contribution programs as a workaround to the $10,000 contribution limit. New York and Connecticut also have other tactics to reduce SALT liabilities, but the IRS could still challenge those.

To contact the reporter on this story: Laura Davison in Washington at ldavison4@bloomberg.net

To contact the editors responsible for this story: Alexis Leondis at aleondis@bloomberg.net, Bill Faries

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