States Should Chart Their Own Course on SALT Deductions

FIGURE 1

While the wisdom of a federal SALT cap is hotly debated, capping deductibility at $10,000 was an unambiguously good idea at the state level. States would be smart to stick with the current cap or, better yet, go even farther and repeal SALT deductions outright. Going along with a higher federal SALT cap would double down on a regressive tax cut that will mostly benefit a small number of relatively wealthy state residents and cost states significant revenue.

To understand why this is the case, it may help to know how we got here. Until 2018, federal law allowed a tax deduction for state and local taxes paid for people who itemized their deductions. Many middle-income taxpayers at the time were itemizers, but this deduction was most lucrative for high-income people who paid relatively higher state and local taxes. In the 2017 tax law, President Trump and Republicans in Congress placed a cap of $10,000 on what people could deduct in state and local taxes. They did this to slightly reduce the cost of what overall was an extraordinarily expensive and regressive tax law, and to do so in a way that disproportionately affected residents of Democratic-leaning states and had less impact on their own constituents.

States often incorporate federal tax law changes into their own tax codes, so it’s not surprising that many states did so in this case. In fact, it was a good idea. While the new federal SALT deduction cap affected taxpayers’ ability to deduct both their state income taxes and their state property taxes, the primary effect of bringing the cap into state income tax calculations was to limit the deductibility of property taxes. That’s because, even though the federal cap covers state income taxes as well as property taxes, only a few states allow taxpayers to deduct state income taxes from state income taxes^[3] – an absurd circular deduction. With state income taxes out of the calculation, most states’ SALT deductions are primarily write-offs for real estate property taxes paid. So in those states that abided by the new federal cap of $10,000, some homeowners have been able to deduct up to $10,000 in property taxes but no more.

So what happens in those states if, as House Republicans propose, the federal cap goes up to $40,000? Since raising the cap allows homeowners to deduct more property taxes, one might be forgiven for imagining that doing so would result in a meaningful form of help for those struggling to afford property taxes. It is not, because most homeowners don’t itemize their deductions and most of those who do already pay less than $10,000 in property taxes. Moreover, in states that apply graduated tax brackets, the deduction ends up being worth more, per dollar deducted, to high-income people in high tax brackets.

There are 86 million owner-occupied houses in the United States, but only about 13 million of those homeowners claim an itemized property tax deduction, according to the latest U.S. Census Bureau and Internal Revenue Service data.^[4] And for most of those 13 million homeowners who do itemize, their average property tax deductions are below the $10,000 cap. (See table.) So raising the cap won’t help them.

The main beneficiaries of increasing the cap will be a small fraction of higher-income, higher-wealth households who own one or more expensive houses. (Property taxes on vacation houses are deductible, even if they’re located in another state.) Even with the $500,000 income limit proposed by House Republicans, most of the benefit from raising the cap would go to a relatively small number of taxpayers with incomes between $200,000 and $500,000 who have property tax bills above $10,000.

In general, households with incomes over $200,000 are not a group for whom property taxes are a problem. Those same IRS data suggest property taxes are more than twice as high, relative to income, for lower-income homeowners than for those with incomes above $200,000. (That’s true for renters, too, who pay taxes in the form of higher rents, but renters aren’t eligible for these deductions at all.)

The proposed new cap would take effect for tax year 2026, i.e. for taxes filed in early 2027. If it is enacted, states that conform automatically to federal tax law (“rolling conformity”) will need to act this year or early in 2026 to ensure that the new cap does not automatically reduce revenue. States that do not automatically conform (“fixed date conformity”) will likely consider a conformity bill in their 2026 legislative sessions or sooner, at which point they can elect to retain the $10,000 cap or eliminate the deduction entirely.

Helping homeowners manage their property tax bills is an important priority for states. But conforming to this federal change, if it happens, would be an expensive and inequitable approach that would provide most of its benefit precisely to the people who need it the least. Instead, states can look at other tools available to mitigate high property taxes for those who have trouble affording them, like homestead exemptions, deferral programs or, best of all, circuit breakers that ensure homeowners and renters alike are not asked to pay more property tax than they can afford.^[5]

TABLE 1

Who Itemizes Their Taxes in the U.S.?

Source: ITEP calculations from Internal Revenue Service data for tax year 2022

TABLE 2

How Much Property Taxes Do Itemizers Pay?

Note: Not all itemizers claim a real property tax deduction, so the average here is among those who do. Source: ITEP calculations from Internal Revenue Service data for tax year 2022.

Source: ITEP calculations from Internal Revenue Service data for tax year 2022