Congressional Policymakers Should Tread Carefully When Weighing New Corporate SALT Deduction Limits

House Republicans are considering new limits on corporate state and local tax (C-SALT) deductions as an offset option for a broader reconciliation bill extending 2017 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. cuts and other spending changes. Policymakers should tread carefully when considering SALT limits on corporations. While it would raise federal revenue, it would also reduce long-run output, burden businesses operating across multiple states, and worsen the structure of the corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .

Policymakers have different options for constructing a C-SALT limitation. Like individuals, corporations pay several types of state and local taxes, including corporate income, property, sales, excise, and severance taxes. Different base definitions would yield dramatically different revenue and economic effects of C-SALT limits.

For example, we find that repealing C-SALT deductions for corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. alone would raise about $223 billion over 10 years. However, if repeal extended to property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. , it would raise an additional $209 billion over 10 years (and perhaps more depending on the exact share of property taxes paid by corporations, which is uncertain given data limitations). Extending a limitation or repeal of C-SALT to sales and other taxes would raise the revenue collection even higher, with corresponding economic harm.

10-Year Conventional Revenue Estimates of Disallowing Corporate State and Local Tax Deductions for Corporate Income and Property Taxes (Billions of Dollars)

Source: Tax Foundation General Equilibrium Model, February 2025

From an economic standpoint, new limits on corporate SALT would increase marginal tax rates on corporate investment, reducing long-run output. We estimate that repealing C-SALT for state and local corporate income taxes paid would reduce long-run GDP and American incomes by 0.1 percent and reduce hours worked by 21,000 full-time equivalent jobs.

Going further and disallowing corporate property tax payment deductibility would reduce GDP and American incomes by 0.2 percent and reduce hours worked by 46,000 full-time equivalent jobs.

Long-Run Economic Effects of Disallowing Corporate State and Local Tax Deductions for Corporate Income and Property Taxes

Source: Tax Foundation General Equilibrium Model, February 2025

The negative economic impact of C-SALT limits could be offset by other pro-growth tax changes. However, the limits could disproportionately impact certain corporations depending on the composition of the other tax changes and which state and local corporate taxes are limited. For example, even accounting for other tax cuts like improved cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. for investment, corporations with significant investment in property may see a net tax hike from disallowing property tax deductions.

The revenue and economic effects of limiting C-SALT deductions are just one aspect of the story. Some of congressional Republicans’ interest in C-SALT deduction is likely spurred by analogy to the personal SALT deduction, which provides the largest tax benefit for high earners in high-tax jurisdictions. The apparent analogy lends itself to the belief that capping corporate SALT will, like the personal SALT cap, reduce distortive tax benefits and enhance state competition.

Unfortunately, the analogy is wrong. It misunderstands corporate income taxation in at least two ways. First, it misunderstands the nature of the corporate income tax, which is imposed on net income (profits). And second, it neglects the role of factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. , which undermines the connection between taxpayer location decisions and state tax liability.

Unlike the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , the corporate income tax is intended as a tax on profits. At the state level, this is even memorialized in the name of some such taxes, as the corporate net income tax or the corporate profits tax. Applying to net income distinguishes the corporate tax from an economically harmful gross receipts taxGross receipts taxes are applied to a company’s gross sales, without deductions for a firm’s business expenses, like compensation, costs of goods sold, and overhead costs. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding. , imposed on all business income without regard to profits. When corporate income flows to individuals in the form of dividend payments or salaries, it is of course taxable as individual income.

To properly target net income, a corporate income tax, therefore, must involve deductions for costs of doing business, like compensation and the cost of goods sold (COGS). It should also allow deductions for tax costs paid to other jurisdictions, because these too are business costs, not part of a business’s profits. Whereas a personal SALT deduction is a tax preference, the corporate SALT deduction is innate to structure of a tax on net income.

Furthermore, while a personal SALT deduction offers a subsidy to high-tax states by reducing the cost of higher rates and spreading some of the burden to nonitemizers across the country, a corporate SALT deduction does not have that effect

Unlike personal SALT, which is mainly an issue for residents of high-tax states, the way corporate income taxes are imposed through apportionment alters the analysis for C-SALT. Multistate corporations have their income apportioned to states through “factor apportionment,” which can involve the location of payroll, property, and sales. Today, however, most states use single sales factor apportionment, which only takes sales into account. If a company makes 10 percent of its sales into a given state, that state will impose its corporate income tax on 10 percent of the company’s net income nationwide—regardless of where the company or its employees are located. A company cannot avoid a state’s high corporate income tax by locating its facilities in a lower-tax jurisdiction.

Apportionment creates a coordination problem. In imposing corporate income taxes, state lawmakers consider concentrated benefits (revenue flowing into the states’ coffers, and what they can do with it) and diffused costs (the economic harm associated with the tax, which is spread across businesses in all states, not just the taxing state). The existing SALT cap in the individual income tax strips the federal subsidy that makes high taxes “cheaper” by spreading the burden nationwide, including to residents of lower-tax states. Without the subsidy, taxpayers are more responsive to their states’ actual tax burdens.

A C-SALT cap would have a different effect. Taxpayers can’t reduce their tax burden through relocation, and most of any given state’s corporate tax burden falls on out-of-state businesses with little ability to influence state decision-making.

One argument against SALT deductions in general, which has sometimes been extended to C-SALT, is that state taxes fund state services, and the benefit of the services is not itself taxed as income. Consequently, the logic goes, if the federal government provides a deduction for state and local taxes, it is implicitly preferencing government-provided services (untaxed) over other forms of income (taxed).

While the claim has some merit, it’s difficult to draw a straight line between the supposed issue and denying the SALT deduction to corporations. Corporations, of course, enjoy the benefits of some state spending, both directly and indirectly, but most state government spending flows to individuals.

Broadly speaking, the largest category of state spending is welfare (about 36 percent), followed by education (32 percent), hospitals and health care (8 percent), roads (6 percent), law enforcement and corrections (3 percent), and government administration (3 percent), with all other functions combining for another 12 percent.

When a child attends a public school, it’s possible to think of this as “income” to the household. Medicaid benefits are likewise income, economically speaking. Very few people, understandably, have any interest in taxing the receipt of these government services, but it’s true that they are untaxed despite being income in some meaningful sense. Denying the C-SALT deduction would mean that these services functionally are taxed to the extent that they are funded by state corporate income tax receipts, but arbitrarily so, since there’s no real correspondence between the corporation and the state-funded services.

Arbitrariness is especially true when apportionment is considered, where a business with the entirety of its operations in Massachusetts still has corporate income tax liability in Nebraska if it sells there, even though any benefit the company receives from Nebraska expenditures on welfare, schools, and health care is incredibly remote. Even beyond any question of how much services to individuals indirectly benefit corporations, the apportionment of burdens across corporations would be almost completely disconnected from that benefit. If, for good reasons, the tax code chooses not to tax Paul’s implicit income, the situation is not improved by arbitrarily overtaxing Peter.

Another argument motivating limits on corporate SALT deductions regards the treatment of pass-through businesses. Pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income is subject to the $10,000 individual SALT cap through the end of 2025, though some pass-through business owners can use workarounds to take full SALT deductions. Some may argue that limiting corporate SALT deductions would equalize the treatment of corporate and pass-through business taxes paid to states and localities. However, neutral treatment could also be achieved by allowing business SALT to be fully deductible for both pass-throughs and corporations. Pass-through entity-level tax regimes adopted by many states, to which the Treasury gave a provisional (and never revisited) blessing, have implicitly allowed pass-throughs to deduct business SALT.

While capping C-SALT has superficial appeal in perceived parity with personal limits, it rests on flawed assumptions about the nature of individual and corporate income taxes. The ability to deduct expenses to yield a tax base of corporate profits is intrinsic to corporate net income taxation. Capping C-SALT is a backdoor increase in effective corporate income tax rates, but a particularly arbitrary one, disproportionately harming businesses and industries with greater exposure to state taxes.

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