Congress continues toward extending the expiring provisions of the Tax Cuts and Jobs Act (TCJA). However, the state-and-local tax (SALT) deduction has emerged as a key point of contention between lawmakers. The TCJA was monumental in lowering taxes for individuals and businesses while simplifying the tax code. While the cap on the SALT deduction is only one of the provisions set to expire at the end of 2025, it is an essential one. It is a key part of congressional attempts to keep the deficit in check and extend the TCJA for the benefit of individuals and businesses.
The current cap on the SALT deduction allows for individuals and joint filers to itemize up to $10,000 in property and income taxes paid to state and local governments. Functioning as a form of federal subsidy, the SALT deduction shifts the federal cost-sharing burden from high-tax state and local governments to low-tax jurisdictions across the country. The cap established by the TCJA has empowered state and local governments to be mindful of their own budgets and tax policy. No more would the federal government soften the blow of their tax-and-spend politics. Notably, low- and middle-income taxpayers rarely benefit from the SALT deduction, as the TCJA doubled the standard deduction and limited itemized deductions.
The SALT deduction presents a test for how lawmakers plan to combat the deficit while extending the expiring TCJA provisions. The cap of $10,000 for both individual and joint filers has been a way to increase revenues. Not including the SALT cap when extending expiring provisions will add billions of dollars to the deficit. Raising the SALT cap will also complicate the tax code because raising the cap to $20,000 would see a significant increase in filers who itemize their deductions. Because the TCJA further limited itemized deductions and expanded the standard deduction, it was effective in making the tax code simpler for all filers. Expanding the SALT cap would undo that work.
Rep. Mike Lawler (R-N.Y.) is a key player in the SALT debate. He represents a district in New York that stands to benefit from the expansion or elimination of the cap on the deduction. Rep. Lawler presented a proposal to expand the cap to $100,000 per individual filer and $200,000 for joint filers. This proposal is a significant departure from the current $10,000 cap. It would do exceptional damage to the deficit and benefit a high-tax state like Lawler’s. Proposals like these only seek to benefit certain, limited constituencies.
There are a number of other proposals surrounding SALT. One includes raising the cap to $15,000 for individuals and $30,000 for joint filers. Another entails making the current cap permanent but doubling for married couples. Yet others would eliminate the income and sales tax deduction portion of SALT. Each of these proposals would cost more than $100 billion on their own, causing more pressure on the deficit.
Another idea floated by lawmakers is including a limit on corporate SALT alone. Corporations and individual filers should be treated similarly by the tax code. A cap should apply to both or neither. As the cap on the deduction allows for state and local tax policy to be assessed more closely, a limit on corporate SALT is just another way to further limit taxpayers from across the country from having to contribute to federal coffers on behalf of taxpayers in California, New York, and New Jersey.
Additionally, lawmakers have proposed fully repealing the SALT deduction rather than just extending the cap. This proposal is sure to get pushback from members like Rep. Lawler. However, it is an attractive solution for future debates, if the cap is permanently implemented. Eliminating the deduction fully would lower deficits by around $1 trillion over the next 10 years. It would also put pressure on high-tax state lawmakers to ease the burden they place on their constituents.
Other proposals to eliminate the SALT deduction for businesses or the sales tax limitation also increase government revenues but by smaller margins. Any proposal to limit SALT is good, as the deduction only benefits certain states and high earners. Lawmakers should be aggressive in how they approach the SALT deduction because extending the expiring cap is only a first step to continuing to simplify the tax code.
Overall, the debate on SALT is an area of potential for lawmakers to continue to create simpler and more efficient tax code, which should be the goal of tax reform. Preventing the TCJA provisions from expiring at the end of 2025 should be the top priority, but Congress should not stop there when it comes to SALT.