House Republicans have recently proposed increasing the SALT deduction’s cap as a fig leaf for repealing the deduction. Right now, this cap is $10,000. Lawmakers are preparing to return to legislative chambers, debate, and vote on new legislation. This little-noticed legislation would be a big deal for taxpayers, especially in blue states like California, Illinois, New Jersey and New York. The SALT cap, as currently implemented, was set by the Tax Cuts and Jobs Act (TCJA) of 2017, to sunset after 2025. Congress will need to act to extend it before that deadline.
The TCJA, signed into law by former President Donald Trump, aimed to simplify the tax code while providing broad tax relief. As critics pointed out from the start, the adoption of the $10,000 SALT cap has been especially problematic for those who choose to itemize their deductions. Businesses and people from those states that pay more in state income and property taxes have borne the brunt. In fact, IRS data shows that around 90% of filers take the standard deduction. This ruling limits their ability to access especially regressive itemized tax breaks, including the SALT deduction.
Lawmakers argue that raising the SALT deduction cap would provide necessary relief to taxpayers burdened by significant state and local taxes. The House Committee on Ways and Means is preparing to mark up the new proposed legislation. This action is an indication that tax reform is back on the agenda.
Even former President Trump has had a turnabout on once defending the SALT cap. He recently announced that he wants to “bring SALT back” if re-elected. This move is a clear response to his previous decision to impose the $10,000 limits back in 2017. That move has been widely criticized by stakeholders ever since.
The political and policy implications of raising or eliminating the SALT cap are enormous. According to the Tax Policy Center, increasing the limit would mostly help households making more than $200,000 a year. If lawmakers remove the SALT cap without any conditions, 73 percent of the benefits will flow to households making $430,000 or more. This modification would disproportionately benefit higher-income people.
In 2025, the standard deduction will increase. Single filers will benefit from a deduction of $15,000, and married couples filing jointly will be able to deduct $30,000. The TCJA doubled the code’s standard deduction starting in 2018 and automatically indexes it for inflation every year. That’s how most taxpayers will see their tax breaks come through this new mechanism. They will not be based on other itemized deductions such as SALT.
Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, shared this key detail. He went on to add that increasing the SALT cap would only help upper-middle-income households. This demographic usually still pays more in state income and property taxes because of their wealth.
The current SALT deduction debate raises larger questions about tax equity and fiscal responsibility. At the same time, lawmakers must determine how best to incorporate the needs of states with high-tax jurisdictions into broader efforts at tax reform.
Garrett Watson, a senior policy analyst at the Washington, D.C.-based Tax Foundation, stressed the importance of treating these issues in an all-encompassing way.
“It all has to come together in the context of the broader package.” – Garrett Watson
As Congress approaches critical decisions regarding the SALT deduction and broader tax reforms, taxpayers across the nation are closely watching the developments. The fate of this piece of legislation may very well set the tone for future tax policy and fiscal responsibility for millions of Americans.