New 50-State Analysis: SALT Cap Repeal Would Be Costly, Mostly Benefit Top 1%

Repealing the 2017 tax law’s cap on state and local tax (SALT) deductions without replacing it with a different type of limit would pile one bad policy on top of the other, annually add $88 billion to the deficit-financed tax law, and mostly benefit the wealthy, a new 50-state analysis released today by the Institute on Taxation and Economic Policy reveals.

The Tax Cuts and Jobs Act (TCJA) placed a $10,000 limit on SALT deductions, a provision that affects a greater percentage of taxpayers in higher-income, higher-tax states. Not surprisingly, some of their representatives in Congress are seeking to eliminate the cap. The ITEP report (A Fair Way to Limit Tax Deductions) notes that the cap appears to target residents in higher-income states but simply repealing it would make the tax law even more costly and benefit the highest-income households.

The report evaluates five policy options to address the cap on SALT deductions. The most problematic of the five is the proposal to solely repeal the cap.

“Repealing the cap would reduce federal revenue by $88 billion in 2019 alone, and nearly two-thirds of that would go to the top 1 percent of taxpayers,” said Steve Wamhoff, ITEP director of federal policy and an author of the report. “Democrats and others widely derided the law after it passed for being a giveaway to the wealthy. Proposing to amend the tax law in a way that would primarily benefit the top 1 percent conflicts with the principles they defined. Lawmakers should not try to fix a deeply flawed tax law by giving more tax benefits to families who need them least.”

Of the five options, outlined below, three raise revenue rather than adding to the already enormous cost of TCJA.

1. Repeal the cap on federal deductions for SALT;
2. Replace the SALT cap with a dollar cap on all itemized deductions ($50,000 for married couples, $30,000 for singles);
3. Replace the SALT cap with a rule allowing each taxpayer no more than 24 cents of tax savings for each dollar of itemized deductions;
4. Replace the SALT cap with new rules that repeal the deduction for mortgage interest, leave the medical expenses deduction unchanged, and limit other itemized deductions each to the excess of 3 percent of a taxpayer’s adjusted gross income (AGI);
5. Replace the SALT cap with new rules that repeal the deduction for mortgage interest, leave the medical expenses deduction unchanged, and limit other itemized deductions each to the excess of a percentage of AGI that slides from 3 percent to 5 percent, depending on the taxpayer’s adjusted gross income.

For detailed analysis of how these proposals would affect taxpayers across the income spectrum and across the 50 states, go to: https://itep.org/a-fair-way-to-limit-tax-deductions/