[UNITED STATES] A new tax proposal, recently passed by the Republican-led House of Representatives and now under Senate consideration, seeks to raise the state and local tax (SALT) deduction cap from $10,000 to $40,000 for taxpayers earning under $500,000 annually. This change could notably affect high-income earners in high-tax states, potentially reducing their federal tax bills.
The SALT deduction allows taxpayers to deduct state and local taxes paid from their federal taxable income. Introduced in the 2017 Tax Cuts and Jobs Act, the SALT cap was set at $10,000, a limit that has been a point of contention, particularly among residents of high-tax states like New York, California, and New Jersey.
The new proposal aims to raise this cap to $40,000 for individuals and married couples earning under $500,000 annually. Additionally, the cap would increase by 1% each year through 2033, potentially reaching $50,000 by the end of the decade. This gradual increase is designed to provide long-term relief to taxpayers in high-tax states.
Supporters of the cap increase argue that it addresses a form of double taxation, where residents of states with higher income and property taxes are effectively taxed twice—once by their state and again by the federal government without the ability to deduct the full amount. Governors and lawmakers from states such as New York and California have consistently lobbied for a higher SALT cap, saying it disproportionately harms their constituents and reduces competitiveness for attracting high-income professionals.
Meanwhile, opponents in Congress caution that the cap’s expansion could undermine efforts to simplify the tax code. They note that one of the original goals of the 2017 cap was to discourage states from maintaining high tax rates under the assumption that residents could simply deduct them federally. With a higher cap, these critics argue, states might feel less pressure to pursue fiscal reform or reduce spending.
Potential Impact on Taxpayers
Economic analysts estimate that the proposed changes could reduce federal tax bills for high-income earners in high-tax states. For example, taxpayers earning between $200,000 and $500,000 could see an almost 1% increase in after-tax income. However, the benefits would be less significant for middle- and low-income households, as many already pay less than the current $10,000 cap and do not itemize deductions.
A Tax Policy Center analysis indicates that repealing the SALT cap entirely would disproportionately benefit the highest-income households. Families earning $430,000 or more would receive nearly three-quarters of the benefit, while low- and middle-income households would see little to no change in their tax bills.
Recent IRS data shows that nearly 90% of SALT deductions are claimed by taxpayers earning more than $100,000 annually, reinforcing concerns that the cap increase serves a narrow segment of the population. In 2021, more than half of all SALT deductions came from just five states—California, New York, New Jersey, Illinois, and Texas—further highlighting the regional disparities tied to this issue.
Fiscal Considerations and Criticisms
Critics argue that raising the SALT cap could significantly increase the federal deficit. The Committee for a Responsible Federal Budget projects that eliminating the cap could add about $1.2 trillion to the deficit over the next decade.
Furthermore, some lawmakers and analysts contend that the proposal primarily benefits wealthier taxpayers, potentially exacerbating income inequality. The lack of support from Senate Republicans representing high-tax states suggests that the proposal may undergo revisions to address these concerns.
In an attempt to find common ground, some senators are reportedly exploring a compromise version of the bill that would tie SALT cap increases to regional cost-of-living indices rather than a fixed income threshold. Such a move could broaden support by targeting relief more precisely to those who are truly overburdened by state and local levies, rather than offering blanket relief based on income alone.
Broader Implications
The debate over the SALT deduction cap highlights broader tensions between fiscal responsibility and tax relief for high-income earners. Supporters of the proposal argue that it provides necessary relief to taxpayers in high-tax states, while opponents caution against the potential long-term fiscal impact.
As the bill moves to the Senate, lawmakers will need to balance these competing interests to determine the final structure of the SALT deduction cap. The outcome could have significant implications for taxpayers, state and local governments, and the federal budget in the coming years.
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