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Increasing the $10,000 cap on the state and local tax deduction could benefit millions of tax filers.
But a proposal to do just that has become a point of contention and a possible roadblock to House Republicans’ passing “one big, beautiful bill” that reflects President Donald Trump’s agenda. That agenda includes making permanent essentially all of the individual income tax provisions from the 2017 Tax Cuts and Jobs Act, which are otherwise scheduled to expire this year.
The SALT deduction, as it is known, enables federal income tax filers to deduct either their state and local income taxes or their state and local general sales taxes. In addition, they are also allowed to deduct their property taxes, assuming their income or sales taxes don’t put them over the cap. The tax break, however, may only be taken by those who itemize deductions on their federal returns, which only a minority of filers do.
Prior to 2017, there was no limit on the SALT deduction.
But the TCJA imposed a $10,000 cap — which, when coupled with the expanded standard deduction under that tax law, meant the number of people who claimed the SALT deduction fell dramatically — from about one-quarter of filers in 2017, according to the Urban-Brookings Tax Policy Center, to less than 10% today.
Going forward, it appears there will still be a cap, but it likely will be higher than $10,000. The question is just how much higher and for whom?
The House Ways and Means and House Budget committees already approved a tax package that would permanently raise the cap to $30,000 for any taxpayer whose modified adjusted gross income is $400,000 or less if married filing jointly (and $200,000 or less for single filers). But anyone above those income thresholds would still be able to deduct at least $10,000, according to the Tax Foundation.
The expectation, however, is that the cap will have to be higher than $30,000 to garner needed votes by a small group of House Republicans.
Republicans introduced the cap as part of their 2017 tax cuts bill to help pay for the sweeping legislation. And they are hoping to use it again as a revenue raiser in this year’s package.
For example, the $30,000 cap proposal, which is expected to be amended before the House bill goes to the floor for a vote as early as Thursday, is estimated to raise $915.6 billion over 10 years relative to simply letting the cap expire as it is otherwise set to do if lawmakers don’t act, according to estimates from the Joint Committee on Taxation.
But GOP lawmakers from high-tax blue states, such as California and New York, are demanding greater relief for their constituents, who are disproportionately affected by the lower cap.
This has sparked intraparty battles with their colleagues from lower-tax red states, whose residents don’t benefit from the deduction nearly as much.
It’s hardly the first time SALT has been the subject of dispute in modern times, said tax historian Joe Thorndike.
The SALT break has been on the books since 1913, when the federal income tax code was created. It also had a decade-long stint during the Civil War as well.
But there have been efforts to limit the deduction over the past five decades. While originally the SALT deduction was created so that the federal government didn’t encroach upon states’ ability to collect revenue, SALT today is portrayed as a subsidy to high-tax states and as regressive in that it disproportionately benefits higher-income households, Thorndike noted.
In 2020, the SALT deduction was claimed on just 8.6% of all federal tax returns, according to the Tax Policy Center.
But the incidence of people claiming it 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.
And those who have received the biggest break — both before and after the cap was imposed — are high-income filers, especially those in high-tax states and cities.
In 2017, before the cap went into effect, for example, roughly two-thirds of the benefit went to those with incomes of $200,000 or more, according to the center. The average SALT deduction was about $13,000, but it topped $30,000 in eight counties, mostly in California and New York.
While the vast majority of middle- and upper-income households received tax relief from TCJA regardless of where they lived, they would have received even more, had the cap not been instituted, said Howard Gleckman, a senior fellow at the TPC.
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, according to the center. 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.
But those in the bottom 80% would not have seen much of a change in the size of their tax cut had the cap not been put in place.
