Eliminating the SALT Deduction Under the “Big Six” Tax Plan

September 27, 2017

The deduction for state and local taxes paid is taking center stage today as a possible revenue increase for tax reform under the “Big Six” plan. While it’s not specifically enumerated, it is strongly hinted that eliminating this deduction is a central part of the framework.

Currently, federal taxpayers are allowed to deduct the greater of their income or sales tax liabilities and their property tax liabilities. Over a 10-year period, the deduction costs $1.8 trillion. After the mortgage interest and charitable giving deductions, it’s one of the largest tax expenditures in the tax code.

My colleague, Jared Walczak, wrote a fantastic primer on the subject earlier this year, but I wanted to make a few key points, given the swirling conversations on the topic.

  • The deduction disproportionately benefits high-income taxpayers. Only 30 percent of Americans itemize deductions on their tax returns, with only 28 percent of filers taking this specific deduction. The overwhelming majority of Americans do not take this deduction.
  • Of those that claim the deduction, almost 90 percent of the deduction flows to those with incomes in excess of $100,000. The deduction favors high-income individuals who are concentrated in high-tax states. Six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of the deduction. But what is missed in that point is that those high-income individuals tend to be concentrated in and around large metropolitan areas. The distribution of the deduction is not monolithic within a state. In Pennsylvania, for instance, individuals claiming the deduction are centered in the Philadelphia suburbs. In Bucks County, about 40 miles north of Philadelphia, the average deduction is $5,444; it’s only $2,866 in Butler County, about 30 miles north of Pittsburgh.
  • Proponents of keeping the deduction argue that eliminating the deduction hurts those below $200,000. First, as noted above, that statistic is a bit misleading, as almost 90 percent of the deduction flows to those making more than $100,000, but even more important is that the underlying analysis does not include the impact of lowering marginal tax rates.

Below is an interactive map showing the mean deduction taken per tax return in each county. Click here for a larger version.

Repealing SALT is not happening in a vacuum. It is offsetting revenues needed to finance other tax cuts.

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A 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.

Tax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans.