State and local tax deduction

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The United States federal state and local tax (SALT) deduction is an itemized deduction that allows taxpayers to deduct certain taxes paid to state and local governments from their adjusted gross income. The Tax Cuts and Jobs Act of 2017 put a $10,000 cap on the SALT deduction for the years 2018–2026.^[1]

The SALT deduction disproportionately benefits wealthy and high-earning taxpayers in areas with higher state and local taxes.^[2][3][4] The Tax Policy Center estimated in 2016 that fully eliminating the SALT deduction would increase federal revenue by nearly $1.3 trillion over 10 years.^[5]

Definition[]

For United States Federal Income Tax purposes, state and local taxes are defined in section 170(a) of the Internal Revenue Code as taxes paid to states and localities in the forms of: (i) real property taxes; (ii) personal property taxes; (iii) income, war profits, and excess profits taxes; and (iv) general sales taxes. The Tax Cuts and Jobs Act of 2017 capped the use of this itemized deduction at $10,000 ($5,000 for married persons who file separately).^[6]

Effects[]

State and local taxes, particularly property taxes, tend to be higher in states with Democratic majorities. In 2016, the ten counties with the largest SALT deductions per filer (on average) were in New York, California, Connecticut and New Jersey.^[7] These ten counties are in the New York metropolitan area and San Francisco Bay Area, which are known for having high concentrations of wealth and expensive real estate. Since the deduction was capped at $10,000 in 2017, many homeowners have been unable to deduct thousands of dollars that they previously could, beyond what they pay in property taxes, to state, county and local governments in these places.^[8]

In 2017, only taxpayers in New York, Massachusetts, Connecticut, and New Jersey (the states with the first, second, third, and ninth highest GDP per capita) on average sent more than $1,000 each to the federal government above what the state received per capita.^[9] Capping the SALT deduction tends to increase this balance of payments deficit.

History[]

In 2021, Tom Suozzi and Chuck Schumer, both Democrats from New York, pushed legislation in the U.S. House of Representatives to repeal the deduction limit.^[10]

The version of the Build Back Better Act the House passed on November 19, 2021, would increase the SALT deduction cap to $80,000 until 2030, after which it would expire. Jared Golden was the only Democrat to vote against the act, because of his opposition to benefiting high-income taxpayers by raising the cap.^[1]

Criticism[]

Critics of the deduction contend that it unfairly results in low-tax states and cities subsidizing high-tax states and cities.^[11]

References[]