Under previous law, individuals who itemized their deductions could deduct certain state and local taxes they paid against their federal taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . To broaden the 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. , the Tax Cuts and Jobs Act limited the amount individuals could deduct in state and local taxes to $10,000. For high-income taxpayers, this cap increased federal taxable income. However, high-income taxpayers also received offsetting tax cuts, such as lower statutory tax rates, a much larger Alternative Minimum Tax exemption, and a reduction in the corporate income tax. On net, these taxpayers tended to have a lower liability under current law, even with the capped SALT deduction.
In March, Rep. Lauren Underwood (D-IL) introduced a bill to increase the limitation on the state and local tax (SALT) deduction and adjust the cap each year for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. .[1]
Description of the Proposal
The proposal would make two changes to current policy’s SALT deduction cap. First, it would raise the cap from $10,000 ($10,000 for married couples filing jointly) to $15,000 ($30,000 married couples filing jointly). Second, it would adjust the cap for inflation each year. Under current policy, the SALT deduction cap is not adjusted for inflation.
Revenue Effect
We estimate that the proposal to raise the SALT deduction cap and adjust it to inflation would reduce federal revenue by $223 billion between 2020 and 2029. This proposal would only affect federal revenue between 2020 and 2025. This is because the SALT cap is scheduled to expire after December 31, 2026 along with most of the other individual income tax provisions passed as part of the 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 Jobs Act.
| Year | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2020-2029 |
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Source: Tax Foundation General Equilibrium Model, March 2019 |
|||||||||||
| Conventional Estimate | -$31 | -$33 | -$36 | -$38 | -$41 | -$43 | $0 | $0 | $0 | $0 | -$223 |
Distributional Effect
Overall, this proposal would make the tax code less progressive. We estimate it would have no impact on taxpayers in the bottom three income quintiles and a negligible impact on taxpayers in the third and fourth quintiles. These taxpayers currently benefit from the new large standard deduction. However, taxpayers in the top 5 and 1 percent of income earners would see an increase in after-tax income of 0.82 percent and 0.42 percent respectively.
| Income Group | Percent Change in After-tax income |
|---|---|
| 0% to 20% | 0.00% |
| 20% to 40% | 0.00% |
| 40% to 60% | 0.00% |
| 60% to 80% | 0.03% |
| 80% to 90% | 0.16% |
| 90% to 95% | 0.41% |
| 95% to 99% | 0.82% |
| 99% to 100% | 0.42% |
| TOTAL | 0.25% |
[1] H.R.1757, “To amend the Internal Revenue Code of 1986 to increase the limitation on the amount individuals can deduct for certain State and local Taxes,” 116th Congress (2019-2020), March 14, 2019, https://www.congress.gov/bill/116th-congress/house-bill/1757/text?q=%7B%22search%22%3A%5B%22underwood%22%5D%7D
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