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SALT Deduction Back to $10,000 from $40,000

The Wall Street Journal reports Senate Trims SALT, Cuts More Medicaid in Proposed Changes to Trump Megabill

Major Changes

SALT. The House’s $40,000 cap on the state and local tax deduction was crucial to getting a handful of blue-state Republicans on board. They have threatened to kill the bill if the Senate lowers that number. But there are no Senate Republicans from high-tax states where this is a major issue. Instead, they see a lower cap as a revenue source and a way to prevent the federal government from picking up part of the tab of state tax increases. House Republicans from New York immediately declared a $10,000 cap unacceptable, and the GOP will fight this out in the coming weeks. 

Mish Comment: They should have killed it. Call the House bluff. Republicans will not opt for a $4 trillion tax hike.

Clean-energy credits. The Senate’s plan creates a longer runway before the end of clean-energy tax credits that were created in Democrats’ 2022 Inflation Reduction Act. The House bill, changed at the last minute to satisfy conservatives, would deny some tax credits to projects that don’t start construction within 60 days or begin operations by the end of 2028. It would also tighten rules on certain foreign content. 

The Senate plan would give projects more time. For example, wind and solar projects could begin construction in 2026 or 2027 and still qualify for some tax credits. Other technologies such as geothermal, nuclear and hydropower energy could get credits if they begin construction as late as 2035, according to a Finance Committee summary. 

Mish Comment: Kill the credits entirely. As with SALT, Republicans in the Senate differ on this in a major way.

Medicaid. The Senate text more aggressively takes aim at increasingly popular Medicaid taxes that states impose on hospitals and other providers as a way to increase federal matching contributions. The Senate text would effectively cap so-called provider taxes at 3.5% for states that have expanded Medicaid under the Affordable Care Act, down from the current 6%. More than 35 states have provider taxes that would have to ratchet down, according to the nonprofit health research organization KFF. The House text, in contrast, froze all provider taxes at current rates.

The Senate bill also reduces certain existing state supplemental payments to hospitals, whereas the House version limited future payments. The provider taxes and the state-directed payments have become an important lifeline for hospitals, who are expected to decry the Senate’s approach. But the changes will cheer fiscal conservatives.

Just as the House bill did, the Senate bill imposes work requirements on able-bodied Medicaid recipients. The Senate bill says adults with dependent children older than 14 are among those who must complete 20 hours a week of community service or work, whereas the House exempted all adults with dependent children from the requirements.

Mish Comment: This should now be easy. If the Senate can ram this through, so can the House. There were three Senate Republicans against these cut, but three is not enough.

Business tax breaks. The Senate bill would make permanent several business tax provisions that the House bill would extend only temporarily. Those include full, immediate deductions for domestic research expenses and equipment purchases, including retroactive research deductions for some smaller businesses. Economists say those changes would do more to encourage growth and investment. 

Mish Comment: I am not in favor of “temporary” provisions. The original TCJA was said to be temporary, now it’s billed as a $4 trillion tax hike. Stop the games.

Pass-through deduction. The Senate would keep the deduction for pass-through businesses—those that pay income taxes through their owners’ individual returns—at 20%, rejecting the House bill’s expansion to 23%.

Mish Comment: The House expansion would help me, but I am not in favor of increasing deficits.

University endowments. While the House bill set the top tax rate on university endowment income as high as 21%, the Senate has a narrower version that would set the top tax rate at 8%. Both are up from today’s 1.4% rate.

Mish Comment: Set it to 20 percent the same I pay. 

Charitable deductions. The Senate bill includes a much larger charitable-donation deduction for people who don’t itemize their deductions and a new limit on those who do. Non-itemizers could claim up to $1,000 or $2,000 for married couples. Itemizers could only claim such donations above a floor that is generally 0.5% of their adjusted gross income. For example, someone with $200,000 in adjusted gross income wouldn’t be able to deduct their first $1,000 of charitable donations.

Mish Comment: Kill charitable deductions entirely.

‘Revenge tax.’ The bill seeks a more limited implementation of what is being called the “revenge tax.” That is a House proposal that would add up to 20% taxes on companies whose home countries have implemented digital service taxes or certain corporate taxes under a global deal negotiated by the Biden administration. Foreign-owned companies have been warning that the proposal would deter investment in the U.S. 

The Senate plan would cap the additional tax increase at 15% and slow down the implementation dates. The Senate version would take effect for many taxpayers in 2027 instead of the House’s 2026 start date. 

Mish Comment: Start it now and go for 20 percent.

Seniors, tips and overtime. The Senate altered back some of the president’s priorities. It would increase a proposed $4,000 per-person deduction for senior citizens to $6,000. That is a version of Trump’s promise to eliminate income taxes on Social Security. 

The “no tax on tips” deduction would be limited to $25,000 per person, as opposed to the uncapped version in the House bill. Similarly, the “no tax on overtime” provision would be limited to $12,500 or $25,000 for married couples, as opposed to the House’s uncapped version. The Senate includes income limits for both new breaks but they are structured differently from the House bill. 

Mish Comment: Kill this nonsense entirely. Why are we making the tax code more complex?

And why the hell are we excluding $25,000 in tips for the expressed benefit of those who get tips to the detriment of everyone else?

Thee Senate capped the deductions, but they are still absurd.

Child tax credit. The Senate bill would boost the child tax credit to $2,200 from $2,000 starting in 2025 and extends that permanently. The House bill includes a $2,500 maximum credit, but only for four years. The Senate does keep the House’s eligibility changes, which would deny the credit to some households where children are U.S. citizens but parents don’t have Social Security numbers making them eligible to work. 

Mish Comment: I would kill the child tax credits entirely. But that idea has no chance.

Foundations. The Senate bill would nix a proposed tax increase on foundations. The House version would have raised a 1.39% annual tax on private foundations’ net investment income to as high as 10%. 

Mish Comment: Since I am in a 20 percent mood, go with 20 percent.

Health savings accounts. The Senate bill doesn’t include the House’s significant expansion of tax-advantaged Health Savings Accounts.

I am OK with Health Savings Accounts.

Debt limit. As expected, the bill includes a $5 trillion increase in the debt limit, up from $4 trillion in the House bill.

Mish Comment: I have no idea why we play these games anymore. Republicans are not fiscal conservatives except they pretend to be when Democrats are in power.

Remittance tax. The Senate bill includes new exceptions to the House’s 3.5% tax on remittances abroad. Remittances funded from certain U.S. accounts or funded with U.S.-issued debit or credit cards wouldn’t be subject to the tax.

Mish Comment: As long as people are paying income tax, then let them spend the rest however they want. They can easily escape this via Bitcoin anyway, and coming soon are stable-coin wallets.

Mish Synopsis

The Senate changes are more favorable than I expected. SALT is the big one, but not big enough IMO.

Medicaid is another step in the right direction.

Wind and solar. Seriously kill both. I am OK with rare earths but draw the line there.

I ask again: Why are we making the tax code more complex by adding out more special interest exceptions?

But we know the answer: Vote buying proposals from hypocrites and fake fiscal conservatives.

What I Expect

The SALT change is very favorable and I hope Trump hammers on the House to accept it. I sense a compromise, the smaller the better.

The Senate made a good set of changes on Medicaid that I think will stick. I thought there might have been a bigger Senate fight.

I expect the Senate caps on overtime and tips to stick.’

The Bottom Line

It’s hard to crow over big budget deficits, but the bill appears to be a significant improvement.

There is a decent chance most of the Senate changes stick.

Budget analysis should be out in a day or to so we can assess the real score card.

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