Analysis of H.R. 1757: A Proposal to Raise the SALT Deduction Cap

April 29, 2019

Kyle Pomerleau

Kyle Pomerleau

Under previous law, individuals who itemized their deductions could deduct certain state and local taxes they paid against their federal taxable income. To broaden the tax base, 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 inflation.[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 Tax Cuts and Jobs Act.

Revenue Impact of H.R. 1757 (Billions of Dollars)
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.

The Distributional Impact of H.R. 1757. 2020
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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How Will Build Back Better Impact Inflation?

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.

Inflation 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.

The state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

An 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.

A 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.

After-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income.