In Democrats’ Build Back Better bill, increase in controversial limit on state and local tax deductions could help wealthier Mass. residents

Representative Josh Gottheimer, a Democrat from New Jersey, was pivotal in pushing for an increase in the limit on state and local tax deductions.Andrew Harnik/Associated Press

The Democrats’ roughly $2 trillion Build Back Better bill is mostly funded by higher taxes on the wealthy. But to secure House passage earlier this month, White House and party leaders had to add a controversial provision that gives a temporary tax break to some of those same Americans if they live in high-cost states — and that would benefit some Massachusetts residents.

The legislation raises a limit on how much in state and local tax payments people can deduct from their federal income taxes. The state and local tax deduction —known in Washington-speak as the SALT deduction — was capped at $10,000 a year by the 2017 tax law enacted by Republicans under former president Donald Trump. Democrats fumed that the provision was designed to punish people in Democrat-led states, where taxes and cost of living are higher.

Now, the Build Back Better bill would increase the annual cap to $80,000 through 2030. In Massachusetts, many residents who itemize their taxes would be able to deduct all their state and local taxes under the increased cap.

The move has left Democrats divided. Some complain that the legislation, which is designed to help lower- and middle-income Americans, should not be giving a tax break to the wealthy. Representative Jared Golden, a moderate from Maine, cited the increased cap as the reason he was the only House Democrat to vote against the bill on Nov. 19. And Vermont Senator Bernie Sanders, an independent who caucuses with the Democrats, has been vocal about his opposition to raising the cap as the bill heads to the Senate.

“At a time of massive income and wealth inequality, the last thing we should be doing is giving more tax breaks to the very rich,” Sanders said in a statement. “Democrats campaigned and won on an agenda that demands that the very wealthy finally pay their fair share, not one that gives them more tax breaks.”

But some Democrats from New York and New Jersey, where many residents were hit hard by the $10,000 cap, said the increase would help protect middle-class families in those and other high-cost areas. Those lawmakers wouldn’t support the bill without the increase, forcing Democratic leaders to include it because of the party’s narrow House majority.

“The cap on the SALT deduction remains a punishing blow to our home states of New York and New Jersey as we work to recover from the pandemic and get our economies on strong footing and our constituents back to work,” Representatives Tom Suozzi of New York and Josh Gottheimer and Mikie Sherill of New Jersey said in a joint statement this month as the final details of the Build Back Better bill were being negotiated. “No SALT, no deal. No SALT, no dice.”

But the cap on the deduction had less of an impact in Massachusetts and members of Congress from the state have not been major proponents of increasing it. A spokesman for Representative Bill Keating, a Democrat from Bourne, said he supports the increased cap. But other members of the state’s congressional delegation did not respond to requests for comment.

The county with the highest average state and local taxes reported by filers of federal income taxes — $18,543 — was New York County, which comprises Manhattan, according to an analysis of 2018 Internal Revenue Service data by the Tax Foundation, a nonprofit think tank. Other counties at the top of the list were in or around New York City, San Francisco, and Washington, D.C.

The highest-ranked Massachusetts county, at number 28, was Norfolk, which includes the suburbs south of Boston and had an average state and local tax per filer of $5,434. And only one other county from the state — Middlesex, which also includes high-cost Boston suburbs — was in the Tax Foundation’s top 50, at number 43.

Raising the cap favors the wealthy, said Howard Gleckman, a senior fellow at the Tax Policy Center, another nonpartisan think tank.

More than half the households earning between about $254,000 and $366,000 annually would get a tax break of about $1,300 through the cap increase, according to the center. Three-quarters of those making $366,000 to $867,000 also get a tax cut, which would average around $4,600.

Middle-income households will only get an average tax cut of about $20 from the increased cap, underscoring the policy’s disproportionate benefit for wealthier households.

Only about one in eight Americans have enough deductions to itemize them on their taxes and claim the state and local break, according to 2018 IRS data. About 70 percent of those who itemize have annual incomes above $500,000. That’s part of the reason the conservative advocacy group Heritage Action for America has branded the cap increase a “bailout of coastal elites.”

There are other measures to tax high earners in the bill, including a surcharge on annual income of more than $10 million. But the Tax Foundation said that even though Build Back Better will increase marginal income tax rates in the long run for high earners and corporations, the higher limit on state and local tax deductions would offset those tax provisions in 2022.

Garrett Watson, a senior policy fellow at the Tax Foundation, estimated that those who earn between $200,000 and $10 million a year — a significant portion of high-income taxpayers — would pay less federal taxes overall in 2022 compared to this year because of the cap increase. Their federal taxes would rise in subsequent years as other provisions in the bill take effect, he said.

The higher cap will increase federal revenue by about $14.8 billion over 10 years, according to Congress’ nonpartisan Joint Committee on Taxation, but that’s because of some budget trickery.

The $10,000 cap currently is set to expire in 2026 along with most other provisions of the 2017 tax law. So putting any limit in place after that generates revenues in the last five years of the decadelong budget window, more than offsetting the $230 billion the increased cap will cost the government over the first five years.

Congress should set a permanent level for state and local tax deduction instead of changing it based on which party controls Congress and the White House, Watson said. The Build Back Better bill would reinstate the $10,000 deduction cap in 2031 because a permanent change to the cap would have added significantly to the roughly $2 trillion bill’s total cost.

“It creates a lot of uncertainty for taxpayers. It’s not great tax policy, to decide to play with it like that,” Watson said.

But many Democrats are still finding it difficult to navigate the politics surrounding the deduction because of the party’s narrow congressional majorities. The bill needs the votes of nearly every Democrat, so lawmakers can’t afford to oppose the cap increase or structure it in a way that doesn’t help the wealthy, Gleckman said.

“The Democrats have almost no way that they can revise the SALT cap without the change being very regressive, without it benefiting high-income households much more than it benefits low-income households,” Gleckman said.

The day before the bill passed the House, White House press secretary Jen Psaki was asked if President Biden was comfortable with the change to the cap given that it provided a tax break for the wealthy. She pointed out the provision wasn’t in Biden’s original Build Back Better bill.

“It’s been conveyed to him by leaders in the House and Senate that this needs to be included in order for this legislation to move forward,” Psaki said.