Raising the current $10,000 cap on the state and local tax (SALT) deduction could offer significant relief to millions of taxpayers. However, the move has sparked deep divisions among lawmakers, threatening to stall a broader tax bill that aligns with former President Donald Trump’s agenda. This legislation aims to make permanent many of the individual tax cuts introduced in the 2017 Tax Cuts and Jobs Act (TCJA), which are set to expire this year.
What Is the SALT Deduction?
The SALT deduction allows taxpayers who itemize their federal returns to deduct state and local income or sales taxes, along with property taxes, up to a certain limit. Before the 2017 TCJA, there was no cap on the deduction. But that law imposed a $10,000 ceiling, which, combined with a higher standard deduction, led to a steep drop in the number of filers claiming it—from about 25% in 2017 to less than 10% today.
Proposed Changes
A new proposal passed by the House Ways and Means and Budget committees would raise the cap to $30,000 for married couples earning up to $400,000 and single filers making up to $200,000. Even higher earners would still be allowed to deduct up to $10,000. But to win enough support from lawmakers—especially those from high-tax states—the final cap may need to be raised even further.
Why the Controversy?
The cap was introduced in 2017 to help offset the costs of the tax cuts. Now, Republicans want to keep using it as a revenue source in the latest tax package. If lawmakers simply let the cap expire, it would cost the government nearly $916 billion over the next decade. The $30,000 cap proposal helps limit that loss, but critics argue it doesn’t go far enough for residents of states with higher taxes.
This has caused tension among Republicans. Those from high-tax, predominantly Democratic states like California and New York want the cap increased or removed, as their constituents are disproportionately impacted. Meanwhile, Republicans from low-tax, largely Republican states oppose the change, saying it unfairly benefits the wealthy.
Who Actually Benefits from the SALT Deduction?
Although only a small portion of taxpayers claim the deduction, it’s concentrated in certain states. In 2020, more than 20% of filers in Maryland and Washington, D.C., claimed the SALT deduction. In states like California, New York, and Massachusetts, 10% to 20% of filers did.
The biggest beneficiaries are high-income earners. In 2017, before the cap was introduced, nearly two-thirds of SALT benefits went to households making $200,000 or more. The average deduction was $13,000, but it exceeded $30,000 in several wealthy counties, mostly in California and New York.
Without the cap, high-income households would have received even larger tax cuts from the TCJA. For instance, the average tax cut for the top 20% would have been $2,500 greater, while those in the top 1% missed out on a potential $71,000 tax cut, receiving only $40,100 instead. In contrast, the bottom 80% of taxpayers would have seen little difference if the cap had not been imposed.
A Long History of Debate
The SALT deduction has existed since the federal income tax was established in 1913, and even briefly during the Civil War. It was originally intended to protect state revenue systems from federal overreach. Today, it’s often viewed as a tax break for the wealthy in high-tax states—a viewpoint that fuels ongoing debate.
As Congress considers adjustments to the SALT cap, the outcome could shape not only tax bills but also the political dynamics within the Republican Party itself.
