SALT

Comments regarding the possibility that owners of passthrough businesses may be able to circumvent the $10,000 SALT deduction cap of section 164(b)(6) by recharacterizing the nondeductible portion of their state and local income tax payments as deductible expenses associated with carrying on a trade or business.

ITEP estimates show that if the House Democrats' proposal was in effect in 2022, it would have a net cost of $81 billion in that year alone. The estimates also show that 51 percent of the benefits would go to the richest 1 percent of taxpayers in the U.S. Clearly, lawmakers concerned about the SALT cap need to go back to the drawing board.

Lawmakers are seeking to achieve a backdoor repeal of the $10,000 cap on deductions for state and local taxes paid (SALT) by invalidating recent IRS regulations that cracked down on schemes that let taxpayers dodge the cap. If successful, their efforts would drain tens of billions of dollars from federal coffers each year, with the vast majority of the benefits going to the nation’s wealthiest families.

The Treasury Department and IRS last summer proposed regulations that would make it more difficult for taxpayers to avoid the $10,000 cap on deductions for state and local taxes (SALT). Now, likely days away from the unveiling of the final version of IRS regulations on SALT cap workarounds, Carl Davis recaps the finer points ITEP will be watching for when the regulations become public.

On Monday a group of Senators and Representatives from the Northeast announced their latest proposal to repeal the cap on deductions for state and local taxes (SALT), this time offsetting the costs by restoring the top personal income tax rate to 39.6 percent. This is an improvement over previous proposals to repeal the cap on SALT deductions without offsetting the costs at all. But the new approach does not improve our tax system overall. Instead, it trades one tax cut for the rich (a lower top income tax rate) for another (repeal of the cap on SALT deductions).

America has long needed a more equitable tax code that raises enough revenue to invest in building shared prosperity. The Tax Cuts and Jobs Act (TCJA), enacted at the end of 2017, moved the federal tax code in the opposite direction, reducing revenue by $1.9 trillion over a decade, opening new loopholes, and providing its most significant benefits to the well-off. The law cut taxes on the wealthy directly by reducing their personal income taxes and estate taxes, and indirectly by reducing corporate taxes.

The cap on federal tax deductions for state and local taxes (SALT) that is in effect now under the Tax Cuts and Jobs Act (TCJA) is a flawed provision but repealing it outright would be costly and provide a windfall to the rich. Congress should consider replacing the SALT cap with a different type of limit on deductions that would avoid both of these outcomes. Using the ITEP microsimulation tax model, this report provides revenue estimates and distributional estimates for several such options, assuming they would be in effect in 2019.