SALT Cap Repeal

Repealing the SALT cap would largely benefit high earners in wealthy areas, and middle-class families could see their taxes go up. In California, for example, only 1 percent of taxpayers in the bottom 60 percent of the state’s income distribution would get any tax cut from the SALT cap repeal, while 97 percent of those in the top 0.1 percent would receive an average of $76,500 in tax cuts.

Despite these concerns, the SALT cap has become a wedge issue in the current political environment. It may be one of the most interesting things to watch in Washington during this upcoming Congress.

SALT Cap Repeal Update

In 2017, the broader tax reform package that Congress passed, known as the Tax Cut and Jobs Act, capped the SALT deduction at $10,000. This move was meant to be a revenue-raising offset to the individual tax cuts in the bill. In reality, the SALT cap has become a major wedge issue, with critics hailing from every walk of life and political party. It’s also a key issue for lawmakers from states with high taxes, including New Jersey and California.

A group of House Democrats, led by Josh Gottheimer and Tom Suozzi, has continued to push for relief on the SALT cap, even though their efforts have failed so far. They sent a letter Friday to U.S. Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, urging the agencies to reverse a rule blocking a state-level SALT relief workaround.

While it’s unlikely that Congress will repeal the SALT cap before 2025, changes to it may eventually make their way into a spending package. But how the changes would be paid for is still in question. It’s also unclear how Senator Joe Manchin, from West Virginia, will vote on any SALT change.

SALT Deduction

The SALT deduction allows you to deduct state and local taxes you pay at tax time, have withheld from your paycheck, or make on an estimated basis. This deduction has been around since 1913 and is a popular way to reduce your federal income tax bill.

When the SALT cap was introduced in 2018, it limited the state and local taxes people can deduct from their federal tax returns to $10,000 per year. That change was made in part to compel people to pay their full federal taxes rather than filing a smaller tax return with fewer deductions. As with other elements of the 2017 tax law, the SALT cap is not permanent. It will sunset along with other provisions in 2026 when the tax law expires. Some lawmakers are working to repeal the SALT cap. But even though they have a clear political stake in doing so, they might not succeed.

The most important beneficiaries of the SALT deduction are high-income taxpayers who tend to itemize their state and local tax deductions. They also tend to live in thriving states with strong economic growth and high-quality schools. In contrast, many low-income taxpayers live in poorer communities where they may have to pay more in state and local taxes than those in wealthy areas. In addition, those living in these areas often have less access to jobs and other benefits than residents of more prosperous communities.

In order to provide a fair and equal playing field for taxpayers in all states, lawmakers should devolve federal programs back to the states instead of shifting them to the federal government. That would allow states to determine the level of taxes they charge their citizens without relying on federal subsidies.