Lawmakers eye paths to enhance SALT deduction

Lawmakers eye paths to enhance SALT deduction

Calls to repeal the cap on the state and local tax (SALT) deduction may seem unanswered, but lawmakers continue to debate the fate of this popular deduction.

The Tax Cuts and Jobs Act of 2017 (TCJA) imposed a $10,000 cap on deducting state and local taxes (SALT) such as local real estate taxes or state income taxes.

While many taxpayers applauded a doubling of the standard deduction as a result of the TCJA, those in higher-taxed areas of certain states lamented the reduction in the SALT deduction.

This year, as deliberations around spending and tax proposals heat up on Capitol Hill, a faction of lawmakers within the House and the Senate are calling for the cap to be repealed or relaxed.

In fact, this spring, a group of bipartisan House lawmakers — called the SALT caucus — formed to advocate for changes to the deduction as part of broader policy discussions on spending and taxes.

Potential ways to provide SALT relief

As discussions among lawmakers have progressed, several specific policy recommendations have emerged. These proposals would be relatively short term, as many tax provisions, including the existing SALT cap, expire after 2025.

1. Full repeal of the $10,000 cap

This would be the most costly option under discussion currently. Some estimates suggest a revenue shortfall of $380 billion over the next few years (Tax Foundation).

2. Double the cap to $20,000

While lawmakers leading the effort have called for full repeal, some are indicating that increasing the cap to $20,000 may be a potential compromise.

3. Eliminate the marriage penalty

Currently, the $10,000 cap applies to single taxpayers as well as married couples filing a joint return. This option, introduced by Senator Susan Collins (R-ME), would increase the cap to $20,000 for married couples.

4. Increase the cap to $15,000 for single taxpayers, $30,000 for married couples filing a joint return

In contrast to a full repeal (#1), this is a lower-cost alternative, with an estimated cost for this option at $130 billion (Tax Foundation estimates). This option also combines the increase cap option (#2) with the elimination of the marriage penalty (#3).

Of course, considering the fluid nature of the conversations on Capitol Hill, different proposals to change the SALT deduction may emerge at some point in the process.

Will higher-income households primarily benefit from SALT changes?

Probably the biggest challenge lawmakers are grappling with is understanding which taxpayers would benefit from a relaxation of the SALT cap. Since prevailing analysis suggests that an overwhelming majority of the benefits would flow to higher-income households, there is talk of imposing an income limit (recent references to $400,000) at which changes in the SALT cap would not apply. The Alternative Minimum Tax (AMT) is also an important factor. The TCJA significantly reduced the number of taxpayers subject to the AMT (from roughly 5 million each year to around 150,000 taxpayers currently*). This is important since the SALT deduction is not available for those taxpayers subject to the AMT. If you relax the SALT deduction rules without changing the AMT, that means that higher-income households will predominantly benefit from the changes. For this reason, I believe if there are changes to the SALT deduction as a result of broader spending and tax legislation, it’s likely that there will be limits imposed based on household income.

*Tax Policy Center estimates.

Discussion continues

More details will emerge as legislation begins to crystalize in both chambers. Any potential SALT changes will be incorporated in a larger tax and spending bill, which certainly will be pursued through the budget reconciliation process. Given a wide range of priorities within the Democratic caucus in both the House and the Senate, the total cost of any changes to the SALT deduction will be a primary focus. The fact that many Democratic lawmakers have expressed public opposition to making SALT changes at this time will also be a factor in the outcome.


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