With many of the positive individual income tax changes made as part of the 2017 Tax Cuts and Jobs Act (TCJA) set to expire in 2025, tax reform is back on the agenda. But while most of that discussion should focus on ensuring that Americans’ tax bills don’t spike in 2025, it has also created a renewed opportunity for legislators from high-tax states to advocate for a tax deduction that carries water for their home states’ harmful tax policies.
The state and local tax (SALT) deduction allows taxpayers who itemize their deductions to deduct the value of some taxes paid to their state and local governments, including income, sales, and property taxes — though deductions for income and sales taxes cannot be claimed under SALT at the same time. Taxpayers who claim the standard deduction are not eligible to claim the SALT deduction.
In 2017, the TCJA capped the value of the deduction at $10,000. That led a host of legislators from states that like to tax their residents for all they’re worth — the SALT caucus — to cry foul and threaten to hold up any future tax reforms until the cap is removed.
After a period of hibernation, the SALT caucus is now back, and it’s as full of odd bedfellows as before. Though the caucus is bipartisan, it counts among its members some of the fiercest critics of the supposed regressivity of the tax code. Attempts by these members to pretend that the cap on the SALT deduction has a significant impact on any but the wealthiest taxpayers fall flat.
That’s in large part because taxpayers who claim the standard deduction cannot also claim the SALT deduction. Most taxpayers take the standard deduction — only about 10 percent of taxpayers itemize their deductions, and most of those are in the top 10 percent of taxpayers by income.
Consequently, removing the cap would have no impact at all on most taxpayers. Just 4 percent of middle-income households would receive any tax benefit from repeal of the SALT deduction cap, and even that 4 percent would receive an average tax benefit of just $400. Taxpayers making more than $1 million on the other hand would receive an average tax benefit of $48,000.
And while legislators from these high-tax states would claim that things are different in their states, they’re not. The progressive Institute on Taxation and Economic Policy found that most the benefit of uncapping the SALT deduction would flow to taxpayers making over $200,000 in annual income in each of California, Illinois, New Jersey, and New York — less than 10 percent of the population in each of these states.
So why the love for a regressive tax break among progressives? The main reason is that high-tax states rely on the SALT deduction to keep their wealthy taxpayers from fleeing to greener pastures. Through the SALT deduction, taxpayers who pay high state and local tax bills essentially get a discount on their federal tax bill, blunting much of the impact on their finances.
But with the SALT deduction capped, wealthier residents of high-tax states are running out of reasons to stick around. Thirty of the 32 voting members of the SALT caucus represent the five states that lost the most net taxable income to migration between states in 2019. In other words, without their SALT discount, taxpayers are running for the hills.
If Congress is thinking about ways to reform the SALT deduction, there’s a far better one — get rid of it entirely. There’s no reason to preserve a tax deduction that protects states that can’t stop raising taxes from their taxpayers’ wrath. SALT caucus legislators concerned that the tax code unfairly benefits the wealthy should look no further than one of their favorite tax perks.
