The United States federal state and local tax (SALT) deduction is an
itemized deduction
Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available.
Mos ...
that allows taxpayers to deduct certain taxes paid to state and local governments from their
adjusted gross income
In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. It is used to calculate taxable income, which is AGI minus allowances for personal exemptions and itemized deduc ...
. The
Tax Cuts and Jobs Act of 2017
The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, , is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs A ...
put a $10,000 cap on the SALT deduction for the years 2018–2025.
The SALT deduction reduces the cost of state and local taxes to taxpayers. It disproportionately benefits wealthy and high-earning taxpayers in areas with comparatively high state and local taxes.
The
Tax Policy Center
The Urban-Brookings Tax Policy Center, typically shortened to the Tax Policy Center (TPC), is a nonpartisan think tank based in Washington D.C. A joint venture of the Urban Institute and the Brookings Institution, it aims to provide independent ...
estimated in 2016 that fully eliminating the SALT deduction would increase federal revenue by nearly $1.3 trillion over 10 years.
Definition
For
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
Federal Income Tax
Income taxes in the United States are imposed by the federal government, and most states. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allow ...
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
The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, , is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs A ...
capped the use of this
itemized deduction
Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available.
Mos ...
at $10,000 ($5,000 for married persons who file separately).
Effects
Tax savings from the SALT deduction flow disproportionately to those with high incomes. According to the
Joint Committee on Taxation
The Joint Committee on Taxation (JCT) is a Committee of the U.S. Congress established under the Internal Revenue Code at .
Structure
The Joint Committee is composed of ten Members: five from the Senate Finance Committee and five from the House ...
, in 2014 88% of the benefit of the SALT deduction accrued to those with incomes above $100,000 and only 1% accrued to those making less than $50,000.
The SALT deduction primarily benefits those in high-tax states, which tend to be those with consistent
Democratic legislative majorities. In 2016, the ten counties with the largest SALT deductions per filer (on average) were in
New York,
California
California is a state in the Western United States, located along the Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the most populous U.S. state and the 3rd largest by area. It is also the m ...
,
Connecticut
Connecticut () is the southernmost state in the New England region of the Northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, New York to the west, and Long Island Sound to the south. Its capita ...
and
New Jersey
New Jersey is a state in the Mid-Atlantic and Northeastern regions of the United States. It is bordered on the north and east by the state of New York; on the east, southeast, and south by the Atlantic Ocean; on the west by the Delaware ...
. These ten counties are in the
New York metropolitan area
The New York metropolitan area, also commonly referred to as the Tri-State area, is the largest metropolitan area in the world by urban landmass, at , and one of the most populous urban agglomerations in the world. The vast metropolitan area ...
and
San Francisco Bay Area
The San Francisco Bay Area, often referred to as simply the Bay Area, is a populous region surrounding the San Francisco, San Pablo, and Suisun Bay estuaries in Northern California. The Bay Area is defined by the Association of Bay Area Go ...
, which have 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.
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. Capping the SALT deduction tends to increase this balance of payments deficit.
Economic modeling by the economists
Gilbert E. Metcalf
Gilbert E. Metcalf is the John DiBiaggio Professor of Citizenship and Public Service and a professor of economics at Tufts University. In addition, he is a research associate at the National Bureau of Economic Research and a University Fellow at ...
and
Martin Feldstein suggests that eliminating the SALT deduction would have "little if any impact on state and local spending".
The economist
Edward Gramlich
Edward M. Gramlich (June 18, 1939 – September 5, 2007) was an American economist who served as a member of the Federal Reserve Board of Governors from 1997 to 2005. Gramlich was also an acting director of the Congressional Budget Office.
G ...
has likewise concluded that eliminating the deduction would have little effect on state and local spending; he also finds that eliminating the deduction would likely not induce many high-income taxpayers to leave low-income communities.
History
Precursor
A deduction on state and local taxes predates the establishment of the permanent federal income tax instituted by the
Revenue Act of 1913.
To help fund the
Civil War
A civil war or intrastate war is a war between organized groups within the same state (or country).
The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government policies ...
effort, President
Abraham Lincoln
Abraham Lincoln ( ; February 12, 1809 – April 15, 1865) was an American lawyer, politician, and statesman who served as the 16th president of the United States from 1861 until his assassination in 1865. Lincoln led the nation thro ...
signed the
Revenue Act of 1862
The Revenue Act of 1862 (July 1, 1862, Ch. 119, ), was a bill the United States Congress passed to help fund the American Civil War. President Abraham Lincoln signed the act into law on July 1, 1862. The act established the office of the Commissio ...
, which established a temporary income tax.
The Revenue Act included a deduction for state and local taxes, as well as national taxes.
This Civil War-era income tax was repealed in 1871. A federal income tax was again
introduced in 1894, and again included deductions for state and local taxes,
but in 1895 the
Supreme Court ruled the income tax unconstitutional in ''
Pollock v. Farmers' Loan & Trust Co.''
Creation: Revenue Act of 1913
The first permanent income tax was established by the
Revenue Act of 1913, after the ratification of the
Sixteenth Amendment to the United States Constitution
The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows Congress to levy an income tax without apportioning it among the states on the basis of population. It was passed by Congress in 1909 in response to the 1895 Sup ...
earlier that year. A deduction for state and local taxes, as well as for national taxes, was included in the Revenue Act.
The federal income tax has included a deduction for state and local taxes ever since.
Various changes
During the
Great Depression, states expanded the number of taxes they levied to make up for revenue shortfalls. This included an expansion in state income taxes (before 1930, only 14 states and Hawaii had state income taxes, which were imposed primarily on very high incomes at low rates) and state
sales taxes (by 1940, sales taxes made up about 60% of state budgets).
In response to the growing use of state sales taxes, in 1942 Congress made an explicit allowance for a deduction of state and local retail sales taxes.
The introduction of the
standard deduction in 1944 limited the scope of the state and local tax deduction, as well as all other
itemized deduction
Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available.
Mos ...
s (taxpayers who choose to use the standard deduction may not use itemized deductions).
On a number of occasions, Congress has restricted the types of state and local taxes that can be used with the SALT deduction. The
Revenue Act of 1964 The United States Revenue Act of 1964 (), also known as the Tax Reduction Act, was a tax cut act proposed by President John F. Kennedy, passed by the 88th United States Congress, and signed into law by President Lyndon B. Johnson. The act became law ...
restricted the SALT deduction to state and local taxes on real property, personal property, income, general sales, and gasoline and other motor fuels.
Amid the
1970s energy crisis
The 1970s energy crisis occurred when the Western world, particularly the United States, Canada, Western Europe, Australia, and New Zealand, faced substantial petroleum shortages as well as elevated prices. The two worst crises of this period wer ...
, Congress passed the
Revenue Act of 1978 The United States Revenue Act of 1978, , amended the Internal Revenue Code by reducing individual income taxes (widening tax brackets and reducing the number of tax rates), increasing the personal exemption from $750 to $1,000, reducing corporate ...
, which eliminated the deduction for state and local taxes on gasoline and motor vehicle fuel.
The
Tax Reform Act of 1986
The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986.
The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...
disallowed sales taxes from being deducted, while the
American Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 () was a federal tax act that repealed the export tax incentive (ETI), which had been declared illegal by the World Trade Organization several times and sparked retaliatory tariffs by the European Union. It ...
gave taxpayers the option of deducting either state and local income taxes ''or'' state and local sales taxes.
Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act of 2017, signed into law by President
Donald Trump
Donald John Trump (born June 14, 1946) is an American politician, media personality, and businessman who served as the 45th president of the United States from 2017 to 2021.
Trump graduated from the Wharton School of the University of P ...
, capped the total SALT deduction at $10,000 for the tax years 2018 through 2025.
The bill also increased the
standard deduction, which significantly reduced the number of taxpayers who claim the SALT deduction.
As a result of the bill, the cost of the SALT deduction decreased from $104 billion in 2017 to $10.4 billion in 2019.
In January 2018, the states of
New York,
New Jersey
New Jersey is a state in the Mid-Atlantic and Northeastern regions of the United States. It is bordered on the north and east by the state of New York; on the east, southeast, and south by the Atlantic Ocean; on the west by the Delaware ...
and
Connecticut
Connecticut () is the southernmost state in the New England region of the Northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, New York to the west, and Long Island Sound to the south. Its capita ...
(whose wealthy residents benefit disproportionately from the SALT deduction) sued the federal government over the constitutionality of the SALT cap, arguing that it unfairly restricts their ability to pursue their own preferred tax policies. In October 2019, a federal court dismissed the suit; appeal was declined by the
Supreme Court on April 18, 2022.
Build Back Better Act
In July 2021, House Representative
Tom Suozzi
Thomas Richard Suozzi (; born August 31, 1962) is an American politician, attorney and accountant who served as the U.S. Representative for from 2017 to 2023. His district included part of the North Shore of Long Island.
A member of the Democr ...
and
Senate majority leader
The positions of majority leader and minority leader are held by two United States senators and members of the party leadership of the United States Senate. They serve as the chief spokespersons for their respective political parties holding t ...
Chuck Schumer
Charles Ellis Schumer ( ; born November 23, 1950) is an American politician serving as Senate Majority Leader since January 20, 2021. A member of the Democratic Party, Schumer is in his fourth Senate term, having held his seat since 1999, an ...
, both Democrats from New York, pushed legislation in the
U.S. House of Representatives
The United States House of Representatives, often referred to as the House of Representatives, the U.S. House, or simply the House, is the lower chamber of the United States Congress, with the Senate being the upper chamber. Together they ...
to repeal the deduction limit. In April 2021, as the
Build Back Better Act
The Build Back Better Act was a bill introduced in the 117th Congress to fulfill aspects of President Joe Biden's Build Back Better Plan. It was spun off from the American Jobs Plan, alongside the Infrastructure Investment and Jobs Act, as a ...
was being debated in the House, a bipartisan group of House lawmakers formed the "SALT caucus" to advocate for the repeal of the $10,000 limit on the state and local tax deduction. They later threatened to block the bill if a raise on the SALT deduction was not included.
Ultimately, the version of the Build Back Better Act that the House passed on November 19, 2021, would have increased the SALT deduction cap to $80,000 until 2030, after which the increase would expire.
Jared Golden
Jared Forrest Golden (born July 25, 1982) is an American politician and a Marine Corps veteran serving as the U.S. representative for Maine's 2nd congressional district since 2019. A member of the Democratic Party, his district, the largest ...
was the only Democrat to vote against the act, because of his opposition to benefiting high-income taxpayers by raising the cap.
The Build Back Better Act stalled in the
Senate.
The
Tax Policy Center
The Urban-Brookings Tax Policy Center, typically shortened to the Tax Policy Center (TPC), is a nonpartisan think tank based in Washington D.C. A joint venture of the Urban Institute and the Brookings Institution, it aims to provide independent ...
concluded that more than 96% of the tax cut from raising the deduction cap to $80,000 would go to the highest-income 20% of households.
Support
Advocates of the SALT deduction argue that it "helps state and local governments fund public services" because "higher-income filers are more willing to support state and local taxes" if they can deduct them from their federal tax liability. For instance, former
Governor of New York Andrew Cuomo
Andrew Mark Cuomo ( ; ; born December 6, 1957) is an American lawyer and politician who served as the 56th governor of New York from 2011 to 2021. A member of the Democratic Party, he was elected to the same position that his father, Mario Cu ...
contended in 2017 that "New York would be destroyed" if the deduction were substantially reduced. But several studies have concluded that the effect of eliminating the deduction on state and local spending would be small.
Advocates also argue that, while the benefit flows disproportionately to high-income taxpayers, it also provides tax relief to some
middle-class taxpayers.
Criticism
Detractors of the SALT deduction, both on the political
left and
right
Rights are legal, social, or ethical principles of freedom or entitlement; that is, rights are the fundamental normative rules about what is allowed of people or owed to people according to some legal system, social convention, or ethical ...
, often point out that the deduction primarily benefits high earners:
according to the
Tax Policy Center
The Urban-Brookings Tax Policy Center, typically shortened to the Tax Policy Center (TPC), is a nonpartisan think tank based in Washington D.C. A joint venture of the Urban Institute and the Brookings Institution, it aims to provide independent ...
, the top 20% of taxpayers by income would receive 96% of the benefit of repealing the SALT cap. Some critics also contend that the deduction in effect results in low-tax states and cities subsidizing the federal tax payments of high-tax states and cities, though this is a contentious argument.
Some
conservative
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization in ...
critics of the deduction argue that it encourages "wasteful spending" by state governments because it "insulates governments from negative consequences when they spend taxpayer dollars inefficiently".
Notes
References
{{reflist
Taxation in the United States
Personal taxes in the United States