May 3, 2021

Relaxing State and Local Tax Deduction Cap Would Make Tax Code Less Progressive

As President Biden’s tax plans are considered in Congress, the future of the $10,000 cap for state and local tax deductions (SALT) is becoming an important part of the tax debate. Certain members of the House and Senate want the SALT deduction cap removed, which would benefit primarily higher earners—and result in a $380 billion reduction of federal revenue through 2025, when the SALT cap is scheduled for repeal.

Policymakers are considering other options to reform or repeal the SALT deduction cap. For example, the $10,000 SALT cap could be doubled for joint fillers, who currently face a marriage penalty. Two single filers may each take up to $10,000 in SALT deductions, but jointly filing means only one $10,000 deduction can be taken. Doubling the cap to $20,000 would remove the marriage penalty, but it would reduce federal revenue by about $75 billion between 2022 and 2025.

Another proposal would increase the SALT cap to $15,000 for single filers and $30,000 for joint filers. This would reduce federal revenue by about $135 billion between 2022 and 2025.

Conventional Revenue Effect of Options to Relax the State and Local Tax (SALT) Deduction
  2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Total

Repeal the $10K SALT Cap

-$87.6 -$92.9 -$97.0 -$102.9 $0.0 $0.0 $0.0 $0.0 $0.0 $00 -$380.4

Double Joint SALT Cap ($10K Single/$20K Joint)

-$17.7 -$18.4 -$18.9 -$19.9 $0.0 $0.0 $0.0 $0.0 $0.0 $00 -$75.0

Double Joint SALT Cap and Make More Generous ($15K Single/$30K Joint)

-$31.5 -$33.2 $-34.3 -$35.9 $0.0 $0.0 $0.0 $0.0 $0.0 $00 -$134.9

Source: Tax Foundation General Equilibrium Model, April 2021

All three options would primarily benefit higher-earning tax filers, with repeal of the SALT cap increasing the after-tax income of the top 1 percent by about 2.8 percent; the bottom 80 percent would see minimal benefit.

Removing the marriage penalty and raising the SALT cap would also mostly benefit higher earners, though after-tax incomes of filers in the 95th to 99th income percentiles would rise the most. For example, raising the SALT cap to $15,000 single and $30,000 joint would result in a 0.8 percent increase in after-tax income for the 95th to 99th income percentiles and a 0.4 percent increase for the top 1 percent.

The top 1 percent benefits less because the SALT cap remains in place, so there is less of a benefit as a portion of their incomes when slightly increasing the cap. For example, a joint filer with $5 million in after-tax income could receive an additional $7,400 in reduced tax liability ($20,000 in increased SALT deductions times the 37 percent top individual income tax rate), which is a 0.1 percent increase in after-tax income.

Conventional Distributional Effect of Options to Relax the State and Local Tax (SALT) Deduction, 2025 (Percent Change in After-Tax Income)
Income Quintile Repeal $10K SALT Cap Make SALT Cap $10K Single/$20K Joint Make SALT Cap $15K Single/$30K Joint
0% to 20% 0% 0% 0%
20% to 40% 0% 0% 0%
40% to 60% Less than +0.05% 0% 0%
60% to 80% Less than +0.05% Less than +0.05% Less than +0.05%
80% to 100% +1.2% +0.2% +0.4%
       
80% to 90% +0.2% +0.1% +0.2%
90% to 95% +0.5% +0.3% +0.4%
95% to 99% +1.2% +0.4% +0.8%
99% to 100% +2.8% +0.2% +0.4%
       
TOTAL +0.7% +0.1% +0.2%

Source: Tax Foundation General Equilibrium Model, April 2021

Making the SALT deduction more generous would provide most of the tax benefit to the top 20 percent of filers. About 98.5 percent of the benefit for repealing the SALT cap in 2025 would accrue to the top 20 percent of filers, and 62.5 percent of the benefit would accrue to the top 1 percent.

Retaining the SALT cap but increasing it to $20,000 for joint filers or to $15,000 for single filers/$30,000 for joint filers would provide more benefit to those in the 90th to 99th percentiles of income than completely repealing the SALT cap, but either adjustment still mostly benefits higher earners. The bottom 60 percent of earners receive about 0.3 percent of the tax benefit under either option.

Conventional Distributional Effect of Options to Relax the State and Local Tax (SALT) Deduction, 2025 (Share of the Tax Change)
Income Quintile Repeal $10K SALT Cap Make SALT Cap $10K Single/$20K Joint Make SALT Cap $15K Single/$30K Joint
0% to 20% 0.0% 0.0% 0.0%
20% to 40% 0.0% 0.0% Less than 0.05%
40% to 60% 0.1% 0.3% 0.3%
60% to 80% 1.3% 4.5% 3.4%
80% to 100% 98.5% 95.2% 96.3%
       
80% to 90% 4.1% 14.2% 10.9%
90% to 95% 7.2% 21.9% 18.3%
95% to 99% 24.7% 40.1% 43.6%
99% to 100% 62.5% 19.0% 23.6%
       
TOTAL 100.0% 100.0% 100.0%

Source: Tax Foundation General Equilibrium Model, April 2021

The distributional and revenue trade-offs are important when thinking about ways to change the SALT cap. Relaxing the cap would cost less federal revenue than outright repeal but would still primarily benefit higher earners in the top 5 percent of the income distribution.

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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 marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples.

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.

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.