Analysis of the “SALT Act”

In early February, Rep. Bill Pascrell Jr. (D-NJ) and Sen. Bob Menendez (D-NJ) introduced a bill to repeal the $10,000 cap on the state and local deduction (SALT) and raise the top 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. rate on ordinary income from 37 percent to 39.6 percent.[1] The SALT deduction cap was introduced as part of the Tax Cuts and Jobs Act as a means to broaden 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. base and partially fund reductions in statutory tax rates, including a reduction in the top rate. Repealing the SALT deduction cap and raising the top tax rate to 39.6 percent would reduce federal revenue by $532 billion over the next 10 years. It would also almost exclusively provide tax relief to the top 20 percent of income earners, the largest tax cut going to the top 1 percent of earners.

Under previous law, individuals who itemized their deductions could deduct the amount of state and local taxes 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. . The taxes individuals could deduct included state and local individual income taxes (or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es), real estate taxes, and personal 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. es. The amount individuals could deduct was unlimited.

The TCJA broadened 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. by limiting the amount individuals could deduct in state and local taxes to $10,000. For high-income taxpayers, this cap increased federal taxable income. By itself, this provision would increase federal tax liability. However, high-income taxpayers also received offsetting tax cuts, such as lower statutory tax rates, a much larger Alternative Minimum Tax ExemptionA 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 Internal Revenue Service (IRS), preventing them from having to pay income tax. , and a reduction in the 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. . On net, these taxpayers tended to have a lower liability under current law, even with the capped SALT deduction.

Although these taxpayers received a net tax cut from the TCJA, lawmakers from high-tax and high-income jurisdictions, such as New Jersey, California, and New York, dislike this proposal. The primary reason is that this $10,000 cap makes taxpayers more sensitive to subsequent state and local tax increases. Under previous law, an individual who faced a state or local tax increase of $1 would end up only facing a net tax increase of between $0.60 and $0.90, depending on their federal marginal rate, due to the SALT deduction. Now under current law, the cap means taxpayers will face the full cost of a state and local tax increase. Some jurisdictions liked the implicit subsidy for additional government spending that existed under previous law.

Representative Pascrell and Senator Menendez’s proposal to uncap the state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. would restore prior-law treatment of state and local taxes and allow individuals to fully deduct them against their federal taxable income. It would pair this with an increase in the top individual income tax rate to 39.6 percent (current policy is 37 percent).

Overall, this swap would reduce revenue collected by the federal government. We estimate that uncapping the SALT deduction and raising the top rate to 39.6 would reduce federal revenue by $532 billion between 2019 and 2028. Raising the rate would raise about $111.3 billion over the next decade. However, eliminating the cap on the SALT deduction would lose much more: $643.3 billion.

Table 1: Eliminating the SALT Deduction Cap, Raising the Top Individual Income Tax Rate to 39.6 percent, Conventional Revenue Estimates (Billions of Dollars)

Source: Tax Foundation General Equilibrium Model, October 2018
	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2019-2028
Raise the Top Rate to 39.6 percent	$13.9	$14.6	$15.2	$15.9	$16.3	$17.0	$18.4	$0.0	$0.0	$0.0	$111.3
Eliminate the Cap on the State and Local Tax Deduction	-$77.7	-$82.3	-$86.1	-$91.1	-$96.2	-$101.7	-$108.2	$0.0	$0.0	$0.0	-$643.3
TOTAL	-$63.8	-$67.7	-$70.9	-$75.1	-$79.8	-$84.8	-$89.9	$0.0	$0.0	$0.0	-$532.0

Eliminating the SALT cap and increasing the top rate to 39.6 percent would make the tax code less progressive. Under current law, only individuals who have itemized deductions that exceed the standard deductionThe 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 (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. are likely to itemize and use the SALT deduction. Itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s such as the SALT deduction are mostly utilized by higher-income individuals. As such, any change to the SALT deduction will chiefly impact them. While increasing the top rate would claw back some of this benefit from very-high income taxpayers, it would not be enough to offset the benefit from eliminating the SALT deduction cap. Thus, the very top still receives a tax cut.

We estimate that eliminating the SALT deduction cap would have no impact on taxpayers in the bottom two 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 incomeAfter-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 their earnings. of 1.25 percent and 2.79 percent respectively. This estimate is for 2025.

Table 2: Distributional Impact of Eliminating the SALT Deduction Cap and Raising the Top Individual Tax Rate to 39.6 percent, 2019, Percent Change in After-tax Income

Source: Tax Foundation General Equilibrium Model, October 2018
0% to 20%	0.00%
20% to 40%	0.00%
40% to 60%	0.00%
60% to 80%	0.03%
80% to 90%	0.15%
90% to 95%	0.40%
95% to 99%	1.15%
99% to 100%	1.77%
TOTAL	0.50%

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[1] Link to House version: https://www.congress.gov/bill/116th-congress/house-bill/1142/text?q=%7B%22search%22%3A%5B%22Pascrell%22%5D%7D&r=2&s=1

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