Bills
| 3.23.22

Should the $10,000 Limit on the State & Local Tax Deduction Be Eliminated? (H.R. 188)

Do you support or oppose this bill?

What is H.R. 188?

(Updated December 14, 2019)

This bill would repeal the $10,000 limit on the state and local tax (SALT) deduction imposed by the Tax Cuts and Jobs Act (TCJA).

This bill’s full title is the Securing Access to Lower Taxes by Ensuring Deductibility Act.

Argument in favor

The state and local tax (SALT) deduction is a major source of tax relief for residents of high-tax states, such as New York. The SALT deduction cap hurts the middle class, and should be reversed to ensure that families living in high-tax states aren’t punished for where they live.

Argument opposed

The SALT deduction primarily benefits those who are upper middle class or better and isn’t a major factor for the majority of middle-class families — most of whom don’t itemize their tax returns. Eliminating the SALT deduction cap increases the deficit to help the rich.

Impact

Taxpayers; high tax states; homeowners; and SALT.

Cost of H.R. 188

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Rep. Nita Lowey (D-NY) reintroduced this bill from the 115th Congress to fully restore the state and local tax (SALT) deduction, which was significantly curtailed by the federal tax overhaul signed into law in December 2017:

“Repealing the SALT deduction was a callous move designed to target New York taxpayers, who are taxed enough as is. That’s why I’m proud to reintroduce my bill. Protecting this deduction is more important than ever with the Trump Administration’s continued assault on the middle class. Our bill ensures that New York families see tax relief, not more tax burdens.”

When she originally introduced this bill in January 2018, Rep. Lowey argued that the SALT deduction elimination unfairly punishes families in high-tax states like her home district of New York:

“Millions of taxpayers in high-taxed states like New York depend on the state and local tax deduction to help pay their expenses and care for their families. By effectively eliminating this deduction, the new federal tax law unfairly punishes families living in states that send more money to the federal government than we get back in federal investments. This is unacceptable, and our bill is a necessary step to providing tax relief—not more burdens—for New York families. The legislation restores the state and local income tax deduction in its entirety, setting aside partisan politics to find a real solution on tax fairness for our constituents.”

Local governments have expressed concern about the SALT deduction limit, as they’re worried that the $10,000 cap will make homeowners more sensitive to property tax or income tax increases, potentially restricting local governments’ abilities to raise money to finance infrastructure.

The Tax Foundation opposes this bill, as it believes eliminating the SALT deduction limit would reduce federal revenue and make the tax code less progressive:

“Representatives Lowey and King’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. This would narrow the individual income tax base and reduce revenue collected by the federal government. We estimate that uncapping the SALT deduction—relative to current law—would reduce federal revenue by $673 billion between 2019 and 2028, including roughly $81 billion in 2019. Eliminating the SALT cap 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. In addition, the value of a deduction increases as a taxpayer’s statutory tax rate increases. A deduction against the top rate of 37 percent is more valuable than a deduction against the 32 percent tax rate. 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.”

Critics of the state and local tax deduction argue that it encourages states and localities to impose higher taxes on their constituents because the deduction takes some of the financial sting out of higher state and local taxes by reducing federal tax liability. As Rachel Greszler, senior policy analyst in economics at the Heritage Foundation, wrote:

“Instead of having to pay the full cost of their taxes, state and local taxpayers who itemize their deductions can force taxpayers in lower-tax states to pick up a big portion — up to 40 percent — of their taxes. As a result, state and local lawmakers are quicker to raise taxes beyond the level that is needed to finance their essential services… If removing the property tax deduction (and other state and local tax deductions) would create a big burden for taxpayers in high-tax states, that’s a problem for state governments to address by lowering their tax burdens.”

The Institute on Taxation and Economic Policy argues that eliminating the SALT cap makes the TCJA worse:

“There are sound justifications for allowing families to deduct SALT on their federal returns, and there are valid criticisms of how the drafters of TCJA chose to strictly limit this type of deduction but not many others. But none of that changes the fact that the cap on SALT primarily affects the highest-income households. Rather than improving the tax law, repealing the SALT cap would only make it worse.”

In the current Congress, this bill has the support of seven bipartisan cosponsors, including five Democrats and two Republicans. It also has the support of the Government Finance Officers Association and other state and local organizations. In the previous Congress, this bill had one cosponsor, Rep. Peter King (R-NY).


Of Note: The Tax Cuts and Jobs Act capped the state and local tax deduction at $10,000 for individuals and $5,000 for married couples filing separately, in part because the standard deduction was doubled to $12,000 for individuals and $24,000 married couples with joint returns — meaning fewer taxpayers would need to itemize and claim the deduction.

Prior to the enactment of the Republican tax law, taxpayers who itemized could deduct their state and local property and income taxes without limitation.

The state and local tax deduction can only be claimed by taxpayers who itemize their returns, so it generally benefits higher earning taxpayers. According to data from our partners at USAFacts, a non-partisan civic data initiative, the average tax savings from claiming the deduction per return in 2015 for taxpayers making less than $61,000 was $144; whereas taxpayers making more than $113,000 saved $1,569 on average and the top 1% of taxpayers saved an average of $21,723.


Media:

Summary by Lorelei Yang & Eric Revell

(Photo Credit: iStockphoto.com / mphillips007)