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As Republicans move closer to passing their $4 trillion tax bill, one provision is proving to be an outsize obstacle: The state and local tax deduction known as SALT. The deduction allows those who itemize when filing their federal taxes to deduct property, sales, or income taxes already paid to state and local governments. It was capped at $10,000 for both individuals and married couples under Trump’s 2017 tax bill, much to the chagrin of Republican politicians in pricey enclaves of liberal states like New Jersey, New York, and California where taxes are high.
Before 2017, SALT was uncapped and, like other provisions from the 2017 Tax Cuts and Jobs Act, the current cap sunsets after this year, unless Congress acts.
In the latest draft of its “one big beautiful” tax bill, the GOP raises the SALT cap from $10,000 to $30,000 for individuals and married couples, and starts phasing it out for those with incomes of $400,000 or more. While triple the current deduction, it’s not enough for some Republican representatives, including Mike Lawler of New York and Jeff Van Drew of New Jersey. And given Republicans have a slim majority of 220-213 in the House, the GOP can only afford to lose a handful of votes and still get their bill passed, assuming all Democrats vote against it.
Where they end up is still open for debate. Some Republicans have proposed eliminating the cap altogether—reverting the law to pre-2018 levels—while others have suggested increasing it substantially (to as much as $100,000 per individual). Futzing with the cap has serious implications on the total cost of the bill. Eliminating it completely could add over $1 trillion to the national deficit over the next 10 years when coupled with other tax cuts, according to the Penn Wharton Budget Model.
Taxpayers in California, Illinois, New Jersey, and New York stand to benefit the most: They account for 40 of the 50 top congressional districts affected by the cap.
Meanwhile, going much higher than $30,000 risks turning off some Republican representatives in low-tax states like Florida.
“The argument for raising or eliminating the cap is that the federal government is imposing tax on funds paid to the state and not really received by the taxpayer,” says Jane Ditelberg, director of tax planning at Northern Trust. “The argument against raising the cap is that taxpayers in low tax states are subsidizing the higher tax states.”
Still, financial advisors say that even doubling the cap for married couples, like many other tax deductions, would be welcome to eliminate the so-called marriage penalty.
In high-tax states, a $10,000 cap doesn’t go very far, says Michael Frost, senior wealth strategist at Truist Wealth. While it is true that wealthier households benefit disproportionately from a higher cap (or no cap at all), less affluent Americans also stand to benefit at a time when inflation has eaten away at household budgets.
“With a cap at $10,000 for total state income and real estate taxes combined, many middle-class families find that they can only deduct a relatively small portion of these expenses,” says Frost.
An analysis from the Tax Policy Center found three-quarters of the benefit of raising the cap to $25,000 would go to those making $250,000 or more, or the top 10% of households. Fully repealing the cap would disproportionately help the richest of the rich, with the 1%—those who make about $1 million or more per year—getting 43% of the benefit.
Importantly, even with the SALT cap, many wealthy households’ tax bills are still smaller than they were in before the 2017 tax bill, thanks to other changes.
This story was originally featured on Fortune.com
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https://fortune.com/article/salt-cap-deduction-gop-tax-plan/
Alicia Adamczyk
