Former President Trump’s ambitious plan to eliminate the $10,000 cap on the state and local tax (SALT) deduction stands as a contentious issue in the tax landscape. A recent analysis by the Tax Policy Center sheds light on the potential consequences of this proposal, revealing stark disparities in its impact on different income brackets. While the top 0.1 percent of high-income families could see a substantial average tax reduction of over $140,000 by 2025, low- and middle-income households seem poised to receive scant benefits from this move.
Key Points from the Analysis:
- The highest-income 0.1 percent of families, with earnings exceeding $430,000, would capture nearly three-quarters of the financial gains from eliminating the SALT cap.
- Households making $63,000 or less, constituting the lowest 40 percent of income earners, might not witness any tax relief with fewer than 1 percent benefitting from the repeal.
- Middle-income households making between $63,000 and $113,000 could anticipate an average 2025 tax cut of $30 post-SALT cap abolition.
The Quandary of Repealing the SALT Cap:
Low- and middle-income households may find the elimination of the SALT cap underwhelming due to their relatively modest state and local tax burdens coupled with the increased standard deduction initiated by the 2017 Tax Cuts and Jobs Act. Consequently, the majority of these households opt for the standard deduction, precluding them from itemizing their deductions. Reinstating the full deduction for state and local taxes might spur some households to itemize, but the impact could remain limited, especially if Congress chooses to uphold the TCJA’s higher standard deduction.
Implications for High-Income Households:
Conversely, affluent households stand to benefit significantly from the repeal of the SALT cap. Business owners in this bracket often sidestep the cap by channeling their state and local taxes through their firms, thereby obtaining a full deduction. However, the cap still impacts many high earners, particularly those in the top 1 percent of income earners, who could witness an after-tax income surge of approximately 1.6 percent, equivalent to around $35,000.
Households in the top 0.1 percent income bracket, earning $4.7 million or more annually, could experience a similar uptick in after-tax income, with an average tax reduction of nearly $141,000.
Challenges and Alternatives:
Contemplating the elimination of the SALT cap raises concerns about its hefty cost and regressive impact on the most affluent segments of society. Various lawmakers have proposed alternatives over the years to reform the SALT cap in a more equitable and cost-effective manner. Suggestions range from replacing the deduction with a fund to support state and local governments during economic downturns to exploring progressive reforms to the existing cap.
However, these proposals have thus far failed to gain traction, perhaps overshadowed by the allure of a straightforward “Repeal the cap” rallying cry that resonates with campaign rhetoric. As the debate rages on, striking a balance between fiscal responsibility and equitable tax policies remains a formidable challenge for legislators across the political spectrum.
