All About SALT, the Tax Deduction That Divides the U.S.
(Bloomberg) -- For as long as Americans have paid federal income taxes, they’ve been able to subract some portion of what they paid to their state and local governments. The size and scope of this federal deduction for state and local taxes -- SALT, for short -- has a big influence on how the federal tax burden is divided, since it tends to help taxpayers in wealthier, more urbanized states, where sales taxes are higher and real estate costs more. President Donald Trump’s 2017 tax reform capped the SALT deduction at $10,000. Restoring it in full is a key priority for Democrats representing districts in high-tax states.
1. Who benefits from the SALT deduction?
In short, relatively high-income individuals -- the 10% to 15% of filers who itemize their federal tax returns rather than take a standard deduction. Were the $10,000 cap to be lifted, more than half of the benefits would flow to households making $1 million or more annually, according to the non-partisan Joint Committee on Taxation. The benefits are largely concentrated among residents living in expensive communities where housing and incomes tend to be higher than average. The Tax Foundation, in 2018, listed New York, New Jersey, Connecticut, California and Maryland as the states where the SALT deduction matters most. All are traditionally “blue” states, meaning they vote Democratic. At the bottom of the list were North Dakota, South Dakota and Wyoming, three Republican “red” states.
2. Why was the deduction capped?
Trump and congressional Republicans enacted the cap to offset some of the revenue lost from their tax cuts, which were implemented in 2018. Some Democratic lawmakers saw it as a thinly veiled attempt to punish blue states. But it’s worth noting that a cap or outright repeal of the SALT deduction has widespread support. Researchers at the Brookings Institution, for instance, call the SALT deduction “a tax cut for people with secure jobs and excellent health insurance, working from expensive homes.” They’d like to see it eliminated altogether.
3. Who wants the full deduction restored?
Several House Democrats, including Representatives Bill Pascrell and Josh Gottheimer of New Jersey and Tom Suozzi of New York, have said they won’t vote for President Joe Biden’s $2.25 trillion infrastructure-and-jobs plan -- one of his biggest priorities -- if the legislation doesn’t include addressing the SALT cap. (Republicans oppose the plan for its corporate-tax hikes, among their many criticisms.) A SALT cap repeal is unlikely to advance as a standalone bill, so supporters need to find other tax legislation in which it could be included. Lawmakers from high-tax states say this is a top issue for their voters and is causing residents to leave their states for lower-tax areas.
4. Are Democrats united on this?
No. Most lawmakers, including many Democrats, represent districts where few people pay more than $10,000 in state income taxes or property taxes. They might find it politically difficult to support what amounts to a tax cut for high earners.
5. Where does Biden come down on the issue?
Biden is less enthusiastic about a SALT cap repeal that some members of the New York and New Jersey delegation. Biden’s American Families Plan proposal didn’t call for a SALT write-off expansion and White House Press Secretary Jen Psaki said that if lawmakers want to expand the deduction, they need to find ways to pay for it. Still, lawmakers are preparing to add a SALT measure to the bill during negotiations in the House.
6. What would repealing the cap cost?
Restoring the full SALT deduction would cost the U.S. Treasury $88.7 billion in lost revenue for 2021 alone, according to the Joint Committee on Taxation. A multiyear repeal would cost considerably more, cutting into resources that some Democrats would like to spend on other priorities. Lawmakers could come to an agreement on something short of a full repeal, such as increasing the cap amount, which would cost considerably less. Treasury Secretary Janet Yellen alluded to “lots of options that have been presented,” when answering a question on the SALT cap from Gottheimer at a March hearing.
The Reference Shelf
- The SALT deduction serves a larger purpose, Peter Coy writes in Bloomberg Businessweek.
- The Tax Foundation’s analysis of who benefits from the deduction.
- From 2017, here’s a map showing the average SALT bill by congressional district.
- The Tax Policy Center looked into whether capping the SALT deduction cost Republicans some House seats.
- Lots of people complaining about the SALT cap never actually got the benefits.
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