SALT Deduction Cap Design Options: Details & Analysis
Heading into 2024, Congress is inching closer to a raft of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
issues related to the expiration of 2017’s Tax Cuts and Jobs Act (TCJA) at the end of 2025. Among these issues is the fate of the $10,000 cap on state and local tax (SALT) deductions, which remains uncertain as some policymakers continue to push for an increase or repeal of the cap ahead of its scheduled expiration in 2026. While they weigh their options, a substantial amount of revenue, and the distribution of the income tax burden, hangs in the balance.
Greater SALT cap relief could have a substantial fiscal cost and make the federal tax code more regressive by disproportionately benefiting higher earners, but it would boost incentives to work, save, and invest by reducing combined federal-state marginal income tax rates. Whichever direction lawmakers choose, SALT policy should be made stable and predictable for taxpayers through a permanent solution.
For background, taxpayers who itemize may deduct either their state income or sales taxes plus their state and local property taxes against their federal taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
. Starting in 2018, the total value of this SALT deduction was limited to $10,000 through the end of 2025. The SALT deduction cap had different effects on taxpayers across the U.S., reflecting differences in state and local taxes.
Since 2021, congressional policymakers within both parties have considered a wide range of ideas for increasing the SALT deduction cap. For example, the Build Back Better Act introduced in September 2021 proposed increasing the SALT deduction from $10,000 to $80,000. Later that year, Sen. Bernie Sanders (I-VT) floated an idea to increase the SALT cap for taxpayers earning under $400,000. More recently, Rep. Jim Jordan (R-OH) reportedly supported increasing the cap to $20,000 for single filers ($40,000 joint) as part of his bid to become Speaker of the House. While the designs differ, all these proposals would reduce federal revenue, make the tax code more regressive, and lower marginal income tax rates.
To illustrate, consider five different options for the long-term future of the SALT deduction. On the one hand, policymakers could make permanent the existing $10,000 cap, or go even further and eliminate the deduction entirely to help pay for making the TCJA individual provisions permanent in 2025. Policymakers may also choose to disallow the many state-level pass-through entity taxes that act as workarounds to the individual SALT deduction cap.
Alternatively, policymakers could compromise by permanently capping SALT at a more generous level than current law, such as a $15,000 cap, doubled for joint filers. Policymakers could also allow the cap to expire and return to a full SALT deduction for itemizers.
The revenue consequences of these decisions are large. For example, eliminating the SALT deduction altogether would raise about $2 trillion over 10 years. If the $10,000 cap was made permanent, it would raise about $1.2 trillion from 2026 to 2033. If Congress enacts rules to end state-level SALT cap workarounds, a permanent $10,000 cap would instead raise nearly $1.4 trillion, an 18 percent increase in revenue over 10 years. (This estimate, while uncertain due to limitations in state-level workaround revenue data, is consistent with other estimates on how workarounds impact SALT cap revenue.) A compromise option that would make permanent a more generous version of the cap compared to current law by increasing the amount to $15,000 single ($30,000 joint) would raise $564 billion over 10 years after losing revenue under the current law baseline in 2024 and 2025.
A full SALT deduction would cost about $226 billion in 2024 and 2025. The range of possibilities from SALT cap repeal to abolishing the entire SALT deduction has revenue implications totaling more than $2.2 trillion over the next decade.
While a permanent cap on SALT deductions would raise substantial revenue, it would reduce long-run economic growth. A cap on SALT deductions raises marginal tax rates on taxpayers taking the deduction, with the more stringent restrictions on the deduction generating large economic effects. For example, eliminating the SALT deduction would reduce long-run GDP by about 1 percent, while a permanent $10,000 cap would reduce long-run GDP by 0.6 percent. Providing a full deduction for SALT would have no long-run impact on economic growth as this is the baseline design for the SALT deduction after 2025. These negative economic effects could be offset by using the revenue from the cap to create new, or extend existing, pro-growth tax reforms.
The fate of the SALT cap also has consequences for the distribution of the tax burden. For example, an uncapped SALT deduction in 2025 would increase the top 1 percent’s after-tax incomes by about 2.7 percent. It would provide no benefit to the bottom 40 percent of taxpayers who generally do not itemize.
This regressive pattern remains even if the cap is in place at a more generous level—a $15,000 SALT cap ($30,000 joint) would increase after-tax incomes of the top 1 percent by 0.3 percent and the 95th to 99th percentile by 0.7 percent but provide little to no benefit to the bottom 60 percent of taxpayers. On the other hand, eliminating the deduction entirely would mostly impact the top 20 percent of earners, reducing their after-tax incomes, with minimal impact on the bottom 40 percent (on a dynamic basis, a permanent SALT cap would reduce after-tax incomes for all income groups through lower economic growth).
The distributional story is similar in 2026 when the baseline changes to an uncapped SALT deduction. Options to put a SALT cap in place would mostly impact higher earners, with the top 20 percent of taxpayers, and especially the top 10 percent, seeing declines in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income.
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Making the $10,000 SALT cap permanent would make the tax code more progressive no matter what happens to state SALT workarounds. However, a ban on such workarounds would increase the SALT cap’s progressivity, leading to a larger drop in after-tax incomes for the top 20 percent of 1.5 percent, compared to 1.3 percent with workarounds permitted. While there are real revenue implications to whether workarounds are permitted long term, they do not change the big-picture story about the regressivity of the SALT cap.
Policymakers have big decisions to make in the coming years about the SALT cap and broader TCJA individual provisions. The facts are that the SALT cap has big revenue implications at a time when federal deficits have reached record levels, and a more generous SALT deduction would make the tax code more regressive. Rather than expanding the SALT deduction, lawmakers should consider further limiting it to pay for broader reforms to the tax code.
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