Analysis of the “SALT Act”

March 11, 2019

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 tax 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 tax 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 income. The taxes individuals could deduct included state and local individual income taxes (or sales taxes), real estate taxes, and personal property taxes. The amount individuals could deduct was unlimited.

The TCJA broadened the tax base 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 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.

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 deduction 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


-$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 deduction are likely to itemize and use the SALT deduction. Itemized deductions 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 income 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%


20% to 40%


40% to 60%


60% to 80%


80% to 90%


90% to 95%


95% to 99%


99% to 100%




[1] Link to House version:

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