The State and Local Tax (SALT) deduction has long been a contentious issue in US tax policy, and recent proposals to increase the $10,000 cap have only added fuel to the fire. This debate is not just about numbers; it's about the principles of fairness, the distribution of tax burdens, and the political dynamics within the Republican Party. As House Republicans grapple with passing "one big, beautiful bill" that reflects President Donald Trump's agenda, the SALT deduction has emerged as a significant roadblock.
The SALT deduction allows federal income tax filers to deduct either their state and local income taxes or their state and local general sales taxes. Additionally, they can deduct their property taxes, provided that the total does not exceed the cap. This tax break is only available to those who itemize deductions on their federal returns, which is a minority of filers. Prior to 2017, there was no limit on the SALT deduction, but the Tax Cuts and Jobs Act (TCJA) imposed a $10,000 cap. This change, combined with the expanded standard deduction, dramatically reduced the number of people claiming the SALT deduction—from about one-quarter of filers in 2017 to less than 10% today, according to the Urban-Brookings Tax Policy Center.
The proposal to increase the cap has sparked intense debate. The House Ways and Means and House Budget committees have already approved a tax package that would permanently raise the cap to $30,000 for taxpayers with modified adjusted gross incomes of $400,000 or less if married filing jointly (and $200,000 or less for single filers). However, this proposal faced opposition from a small group of House Republicans whose constituents benefit significantly from the tax break. By Wednesday morning, House Speaker Mike Johnson announced a new agreement with the SALT caucus to raise the cap to $40,000 for a decade for households making less than $500,000. For those making more, the cap would be reduced gradually between $500,000 and $800,000, with households making over $800,000 able to deduct $10,000.
The uncertainty lies in whether this compromise will be accepted by conservatives who dislike the SALT deduction and have been pushing for deep spending cuts. The cap was introduced in 2017 as part of the tax cuts bill to help fund the legislation, and Republicans hope to use it again as a revenue raiser in this year's package. For instance, the $30,000 cap proposal was estimated to raise $915.6 billion over 10 years relative to letting the cap expire, according to the Joint Committee on Taxation. A higher cap covering more households, as in the tentative agreement, would result in less revenue gained, potentially exacerbating the intraparty battle over the SALT deduction.
This battle is particularly pronounced between GOP lawmakers from high-tax blue states, such as California and New York, and their colleagues from lower-tax red states, whose residents benefit less from the deduction. Even if all House Republicans can agree, the Senate's stance remains uncertain, as it is expected to amend the final House tax-and-spending bill.
The SALT deduction has a long history, dating back to 1913 when the federal income tax code was created. It also had a brief stint during the Civil War. Over the past five decades, there have been multiple efforts to limit the deduction. Originally designed to prevent the federal government from encroaching on states' revenue collection abilities, the SALT deduction is now seen by some as a subsidy to high-tax states and as regressive, disproportionately benefiting higher-income households.
In 2020, the SALT deduction was claimed on just 8.6% of all federal tax returns, according to the Tax Policy Center. However, its use was most concentrated in 13 states and the District of Columbia. The deduction was claimed on more than 20% of returns from Maryland and Washington, DC, and on 10% to 20% of returns filed by residents of California, Colorado, Connecticut, Georgia, Hawaii, Massachusetts, New Jersey, New York, Oregon, Utah, Virginia, and Washington State. High-income filers, especially those in high-tax states and cities, have historically received the biggest benefits from the SALT deduction.
Before the cap was imposed in 2017, roughly two-thirds of the SALT deduction benefits went to those with incomes of $200,000 or more. The average SALT deduction was about $13,000, but it topped $30,000 in eight counties, mostly in California and New York. While the majority of middle- and upper-income households received tax relief from the TCJA regardless of their location, they would have received even more without the cap. For example, the tax cut for those in the top 20% would have been $2,500 larger, on average, had their state and local tax deductions not been limited. Their average individual income tax cut was only about $6,200, instead of $8,700. The cap had an even greater impact on taxpayers in the top 1%, whose average tax cut was $40,100, instead of $71,000. However, those in the bottom 80% saw little change in the size of their tax cuts.
The debate over the SALT deduction is not just about the numbers; it's about the principles underlying tax policy. On one hand, increasing the cap could provide significant relief to millions of taxpayers, particularly those in high-tax states. On the other hand, it could be seen as a subsidy to the wealthy, further exacerbating income inequality. The political dynamics within the Republican Party add another layer of complexity, with lawmakers from different states having divergent interests.
As the House and Senate navigate these challenges, the future of the SALT deduction remains uncertain. The compromise reached by the SALT caucus is a step towards resolution, but it remains to be seen whether it will satisfy all parties involved. The stakes are high, as the outcome will not only affect millions of taxpayers but also shape the broader tax reform agenda. In a political landscape where every vote counts, the SALT deduction has become a pivotal issue, highlighting the intricate balance between fairness, revenue, and political feasibility.
