The Future of the SALT Deduction Cap: Congressional Developments and Implications for High-Tax States
- 5 days ago
- 4 min read
As 2025 unfolds, the fate of the state and local tax (SALT) deduction cap is a central issue in federal tax policy debates. The $10,000 cap, introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, is set to expire at the end of 2025 unless Congress acts. With a new Republican majority in Congress and President-elect Trump signaling interest in revising the cap, the legislative landscape is dynamic and uncertain. Here’s a look at the current situation in Congress, the potential consequences of increasing the SALT cap, and what it means for taxpayers in high-tax states.
Current Congressional Landscape
The TCJA’s $10,000 SALT cap, which limits the amount of state and local property, income, and sales taxes that can be deducted on federal returns, was originally enacted as a revenue-raising measure and to address perceived inequities between high- and low-tax states. As the TCJA’s individual provisions approach their scheduled sunset at the end of 2025, Congress faces a pivotal decision: let the cap expire, extend it as is, or modify it.
President-elect Trump has publicly expressed support for raising or even eliminating the SALT cap, a notable shift from the original policy. Congressional Republicans, however, are divided. Some, especially those representing high-tax states like New York, New Jersey, and California, are pushing for relief, while fiscal conservatives are wary of the revenue loss that would result from a full repeal or significant increase of the cap. Proposals under discussion include doubling the cap to $20,000 for certain taxpayers, indexing it to inflation, or introducing a floor based on a percentage of adjusted gross income (AGI).
The legislative process is further complicated by the need to use budget reconciliation to pass any tax bill with a simple majority in the Senate, given the lack of a filibuster-proof majority. Under reconciliation rules, any provision that increases the deficit beyond a 10-year window must sunset, so even an increased cap would likely be temporary unless offset by other revenue measures.
Potential Consequences of a SALT Cap Increase
1. Relief for High-Tax State Residents
Raising the SALT cap would primarily benefit taxpayers in states with high income and property taxes. In states like New York, New Jersey, and California, many residents pay well above $10,000 in combined state and local taxes. Under the current cap, these taxpayers cannot deduct the full amount, resulting in higher federal tax liabilities. Increasing the cap to $20,000 or more would allow a larger portion of these taxes to be deducted, reducing federal taxable income and, consequently, federal tax bills.
2. Distributional Effects
The benefits of a higher SALT cap would be concentrated among higher-income taxpayers, who are more likely to itemize deductions and pay substantial state and local taxes. According to recent analyses, the majority of filers claiming the SALT deduction have incomes above $500,000. While a cap increase would provide some relief to middle-income taxpayers in high-tax states, the largest dollar benefits would accrue to those at the top of the income distribution.
3. State and Local Government Impacts
A higher SALT cap could reduce the pressure on high-tax states to lower their tax rates or cut services, as the federal deduction would once again offset a greater share of state and local tax burdens. This could make it politically easier for these states to maintain or even increase tax rates, knowing that residents would receive more federal tax relief.
4. Housing and Consumption Effects
The cap’s removal or increase could also affect housing markets in high-tax areas. With greater deductibility of property taxes, homeownership in high-tax jurisdictions could become more attractive, potentially increasing demand and home prices. Similarly, increased deductibility of personal property taxes (such as those on vehicles) could encourage purchases of taxed items.
5. Tax Planning and Workarounds
The current cap has spurred the creation of state-level workarounds, such as passthrough entity (PTE) taxes, which allow owners of partnerships and S corporations to deduct state taxes at the entity level, bypassing the individual cap. If the cap is increased or eliminated, the value and necessity of these workarounds would diminish, though some taxpayers may still benefit from them depending on their specific circumstances.
6. Federal Revenue and Policy Trade-Offs
Raising the SALT cap would reduce federal tax revenue, with estimates suggesting that doubling the cap could cost the Treasury billions annually. Policymakers must weigh this against other priorities, such as maintaining lower tax rates or funding new initiatives. Some proposals suggest pairing a higher cap with a floor (e.g., only allowing deductions above a certain percentage of AGI) to limit revenue loss and target relief to those most affected.
What’s Next?
As Congress debates the future of the SALT deduction, several outcomes are possible:
Extension of the $10,000 Cap: The cap could be extended as is, especially if fiscal concerns dominate.
Increase or Indexing of the Cap: The cap could be raised (e.g., to $20,000) or indexed to inflation, providing more relief but at a higher revenue cost.
Introduction of a Floor: A floor based on a percentage of AGI could be introduced, allowing larger deductions for those with high state and local tax burdens while limiting benefits for the highest earners.
Full Repeal: While less likely due to the cost, full repeal of the cap remains a possibility, especially if bipartisan support emerges.
For taxpayers in high-tax states, the outcome will have significant implications for their federal tax bills and financial planning. Those who itemize deductions and pay substantial state and local taxes should monitor legislative developments closely and consult with tax professionals to optimize their strategies as the law evolves.
Conclusion
The debate over the SALT deduction cap is emblematic of broader tensions in federal tax policy: balancing revenue needs, fairness, and the interplay between federal and state tax systems. As Congress considers the next chapter for the SALT deduction, taxpayers — especially those in high-tax states — should stay informed and be prepared for changes that could meaningfully affect their bottom line.
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