The proposal to increase the $10,000 cap on the state and local tax (SALT) deduction has stirred significant debate among lawmakers, potentially affecting millions of tax filers. This issue is vital as it could serve as a critical piece in House Republicans’ efforts to pass a comprehensive tax reform bill that aligns with President Donald Trump's agenda. Central to this agenda is the desire to make permanent nearly all individual income tax provisions outlined in the 2017 Tax Cuts and Jobs Act (TCJA), which are set to expire soon.
The SALT deduction allows federal income tax filers to deduct either their state and local income taxes or general sales taxes, along with property taxes, provided their total does not exceed the $10,000 cap. However, this deduction is only available to those who itemize their deductions, a choice made by a minority of taxpayers. According to the Urban-Brookings Tax Policy Center, prior to the enactment of the TCJA in 2017, there was no limit on the SALT deduction, which resulted in approximately one-quarter of filers claiming it. Today, that number has plummeted to under 10% due to the imposed cap.
Looking forward, it seems likely that the SALT deduction cap will remain but may be raised above $10,000. Recently, the House Ways and Means and House Budget committees approved a tax package suggesting an increase to $30,000 for taxpayers with a modified adjusted gross income of $400,000 or less for married couples filing jointly (and $200,000 or less for single filers). Taxpayers exceeding these thresholds would still retain the ability to deduct at least $10,000, according to the Tax Foundation.
However, a faction of House Republicans, representing constituents who benefit from the SALT deduction, has publicly opposed the proposal. As of Wednesday morning, House Speaker Mike Johnson announced a tentative agreement to raise the cap to $40,000 for households earning less than $500,000 annually. For those earning between $500,000 and $800,000, the cap would gradually decrease, while households earning over $800,000 would still be capped at $10,000.
The ongoing debate raises questions about whether this compromise will garner support from conservative factions who oppose the SALT deduction and advocate for substantial spending cuts. The SALT deduction was initially introduced as part of the 2017 tax reform to fund broad tax legislation, and Republicans aim to leverage it again as a revenue source in the current tax and spending package. For instance, the proposed $30,000 cap could generate an estimated $915.6 billion over ten years compared to allowing the original cap to expire, according to the Joint Committee on Taxation.
Raising the cap to cover more households, as suggested in the recent agreement, would likely reduce the projected revenue, intensifying the ongoing conflict between GOP lawmakers from high-tax blue states like California and New York and those from lower-tax red states who see minimal benefits from the deduction.
Tax historian Joe Thorndike notes that the SALT deduction has been a topic of contention for many years, having first been established in 1913. Over the decades, there have been various attempts to limit this deduction. Originally intended to prevent federal interference with state revenue collection, critics now view it as a subsidy for high-tax states and argue that it disproportionately aids higher-income households.
Data from the Tax Policy Center reveals that in 2020, only 8.6% of federal tax returns included the SALT deduction, with its benefits concentrated in just 13 states and the District of Columbia. Notably, more than 20% of returns from Maryland and Washington, D.C., claimed the deduction, while states like California, Colorado, and New York saw claims on 10% to 20% of their returns.
High-income earners, particularly in high-tax states, have consistently reaped the largest benefits from the SALT deduction. For instance, in 2017, prior to the cap, about two-thirds of the deduction's advantages went to households earning $200,000 or more. The average SALT deduction was approximately $13,000, with some areas, primarily in California and New York, exceeding $30,000.
While the majority of middle- and upper-income households benefited from the TCJA, they would have seen even greater tax relief had the SALT cap not been implemented. For example, the average tax cut for those in the top 20% would have increased by $2,500 if the deduction hadn’t been limited. Similarly, the top 1% would have experienced an average tax cut of $40,100 instead of $71,000.
In contrast, taxpayers in the bottom 80% would not have noticed significant changes in their tax cuts had the SALT cap not been introduced, emphasizing the regressive nature of this deduction.
