LegiStorm

Summary:

Taxpayers who elect to itemize their deductions may reduce their federal income tax liability by claiming a deduction for certain state and local taxes paid, often called the "SALT deduction." The 2017 tax revision (commonly referred to as the Tax Cuts and Jobs Act, TCJA; P.L. 115-97) made a number of changes to the SALT deduction. Most notably, the TCJA established a limit, or "SALT cap," on the amounts claimed as SALT deductions for tax years 2018 through 2025. The SALT cap is $10,000 for single taxpayers and married couples filing jointly and $5,000 for married taxpayers filing separately. The changes enacted in the TCJA will considerably affect SALT deduction activity in the next several years. The increased value of the standard deduction (roughly doubling from its pre-TCJA value for tax years 2018 through 2025), along with the reduced availability of SALT and other itemized deductions, are projected to significantly reduce the number of SALT deduction claims made in those years. The Joint Committee on Taxation (JCT) projected that repealing that SALT cap for tax year 2019 would increase federal revenues by $77.4 billion. The SALT deduction reduces the cost of state and local government taxes to taxpayers because a portion of the taxes deducted is effectively paid for by the federal government. By reducing the deduction's value, the SALT cap therefore increases the cost to the taxpayer of state and local taxes. That may affect state and local tax and spending behavior, as any reduction in state and local revenues from increased sensitivity to SALT-eligible tax rates must be offset by reductions in outlays or increases in other revenue to maintain budget outcomes. The SALT cap's effect on the SALT deduction's value is in part a function of state and local tax policies. Nationwide, there is considerable variation in both the combined level of income and sales taxes levied by states and the property taxes and other charges levied by local governments. Differences in incomes and price levels that serve as the base for those taxes are another source of disparity in SALT cap exposure. Internal Revenue Service (IRS) data showed that in 2017, the average SALT deduction claimed in New York ($23,804) was more than four times the average in Alaska ($5,451). The SALT cap predominantly affects taxpayers with higher incomes. State and local tax payments tend to increase with income, both as a direct function of the income tax structure and because higher incomes lead to increased consumption and thus sales and property tax payments. Increased income, therefore, makes higher-income taxpayers more likely to make SALT-eligible tax payments in amounts exceeding the SALT cap value. The benefit of SALT deductions in terms of tax savings is also larger for taxpayers with higher incomes because a federal tax deduction's value is proportional to the taxpayer's marginal income tax rate. JCT projected that more than half of 2019 benefits for the SALT deduction will accrue to taxpayers with incomes exceeding $200,000. Several pieces of legislation introduced in the 116th Congress would modify the SALT cap, including legislation that would (1) repeal the SALT cap entirely; (2) increase the SALT cap's value for all taxpayers; (3) increase the SALT cap's value for some taxpayers; (4) make the SALT cap permanent; and (5) repeal IRS regulations affecting SALT cap liability. Following enactment of the TCJA, several states proposed or passed legislation that provided possible avenues to reduce the SALT cap's effect on taxpayers without reducing their relevant state or local tax burdens. Subsequent guidance by the IRS, however, makes it unclear or unlikely that those laws will prevent taxpayers from experiencing the SALT cap's effects.