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 subtract some of what they pay to their state and local governments. This federal deduction for state and local taxes -- the SALT deduction, for short -- has a big influence on how the tax burden is divided. 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 Democratic lawmakers who represent districts in high-tax states.

1. Who uses the SALT deduction?

Mainly those with relatively high incomes -- 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 nonpartisan Joint Committee on Taxation. 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, implemented in 2018. Some Democratic lawmakers saw it as a thinly veiled attempt to punish blue states.

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 hoped-for $3.5 trillion spending program for education, health and climate programs if it doesn’t address the SALT cap. (Republicans oppose the plan for its corporate-tax hikes, among their many criticisms.) A budget blueprint drawn up by Senate Democrats, released on Aug. 9, specifically directs lawmakers to address the SALT cap. Legislators 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. Researchers at the Brookings Institution 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. As lawmakers weigh how to address the SALT cap in legislation in coming months, they could find a compromise that lets some taxpayers deduct more of their state and local levies but maintains some limits on the size of the deduction.

5. Where does Biden come down on the issue?

Biden is less enthusiastic about a SALT cap repeal than some members of the New York and New Jersey delegations are. His proposed American Families Plan didn’t call for a SALT deduction expansion; 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 provision into legislation to carry out Biden’s spending proposals.

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 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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