As the Senate considers next steps for the House-passed “big, beautiful” tax bill, the battle lines have been drawn for a showdown over the state and local tax (SALT) deduction.
The House package accommodates demands for a more generous SALT cap. For the sake of fairness and fiscal responsibility, the Senate should reconsider and hold the line against efforts to expand the cap beyond the design in place this year.
For the last eight years, the SALT deduction has been capped at $10,000 for all taxpayers, but the cap is scheduled to expire along with the other individual tax changes from the 2017 Tax Cuts and Jobs Act (TCJA) at the end of this year.
The House version of the bill could have made the existing deduction cap permanent. The $10,000 cap would raise $981 billion over 10 years to help offset the cost of other tax cuts, while mostly impacting the top 20% of earners.
The House tax plan raises the SALT cap to $40,000 for most taxpayers and creates new income limits for those earning more than $500,000.This design would provide a full SALT deduction for well more than 90% of taxpayers in the most impacted areas of the country, while also making the other TCJA tax cuts permanent.
A group of policymakers known as the SALT Caucus is the source of demands for a bigger SALT deduction. If they don’t get their way in the final version of the bill and the bill falls through, 62% of taxpayers across the country could see an average tax hike close to $3,000 come next year.
There are several problems with the SALT Caucus demands: the revenue math does not work, it neglects the other tax cuts provided in the 2017 tax law, and it undercuts the group’s own claims of fairness in the tax code.
Take the House proposal to raise the cap to $40,000, limited for those earning more than $500,000. It would cost about $350 billion on its own compared to an extension of the existing cap, according to Tax Foundation modeling.
The House bill already suffers from a math problem, as the tax cuts exceed $4 trillion and the package would raise the budget deficit by about $2.6 trillion over 10 years including proposed spending cuts. The net effect is a recipe for worsening fiscal irresponsibility at a time when Congress needs to be reducing the deficit, not adding to it.
A more costly SALT deduction also creates missed opportunities for sound tax policy in the package. The bill temporarily revives 100% bonus depreciation and R&D expensing through 2029 but fails to make these pro-growth provisions permanent. Permanency would cost about $100 billion over 10 years after factoring in economic growth’s impact on revenue, which could easily come from a more stringent SALT cap.
Beyond the fiscal math, the SALT Caucus has framed the debate as a fairness issue. But this neglects some inconvenient facts. First, taxpayers with limited SALT deductions often couldn’t deduct that same SALT prior to the TCJA because of the stricter alternative minimum tax (AMT). Is it fair to provide an additional SALT benefit on top of a more generous AMT in this package?
The pro-SALT advocates also ignore the fact that most taxpayers saw a net tax cut from the TCJA, even when accounting for the SALT cap. The cap was just one aspect of the package — the lower rates and brackets, expanded child credit, and smaller AMT, among other items, add up to net tax savings for all but the highest of earners.
And that’s the other problem with a more generous SALT deduction: only very high earners would benefit. Even with an income phaseout for taxpayers earning more than $400,000, filers earning between $200,000 and $600,000 would benefit most from raising the cap from $10,000 to $40,000. We’re talking about increasing tax benefits for those who earn more than double the median household income in this country. That’s hardly a call for fairness in the tax code.
Demands to raise the $10,000 SALT cap are disconnected not just from fiscal reality but also from the principles of sound tax policy. The TCJA’s most successful elements broadened the tax base to pay for simpler, pro-growth tax changes.
Letting the SALT cap slip further upwards would undercut TCJA’s long-term legacy, worsening the fiscal outlook of the tax package and providing an unneeded benefit to higher earners. Policymakers should at minimum hold the line and retain the current SALT $10,000 deduction limit.
Watson is director of policy analysis at the Tax Foundation.
