Should the Cap on the State & Local Tax Deduction be Eliminated? (H.R. 4789)

What is H.R. 4789?

(Updated January 14, 2019)

This bill — the Cutting Local Taxes by Reinstating SALT Act — would eliminate the cap on individual tax deductions for state and local taxes (aka SALT). The enactment of the Tax Cuts and Jobs Act capped the deduction at $10,000 per year for individuals or $5,000 for married individuals filing separate returns for tax years 2018-2025.

Argument in favor

By limiting the state and local tax deduction, the GOP tax bill raised taxes on taxpayers who itemize in states with relatively higher tax burdens. The limitation should be eliminated so that taxpayers who itemize can deduct all of their state and local income and property taxes.

Argument opposed

The state and local tax deduction encourages state and local governments to raise taxes beyond what is necessary, because taxpayers claiming the deduction pay less in federal taxes so the true cost is hidden. Besides, fewer people will itemize with a higher standard deduction.

Impact

Taxpayers; state and local governments; and the federal government.

Cost of H.R. 4789

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Rep. Josh Gottheimer (D-NJ) introduced this bill to remove the cap on the state and local tax deduction that was imposed with the enactment of the Tax Cuts and Jobs Act:

“The sole purpose for eliminating the State and Local Tax Deduction was an assault on New Jersey families and small businesses, while redistributing our hard-earned wages to Moocher States, such as Mississippi and Alabama. In Jersey, we don’t just take a punch and snake away into the corner. No, we stand up [and] fight.”

Original cosponsor Rep. Leonard Lance (R-NJ) added:

“No taxpayer should have to pay taxes on taxes. The state and local tax deduction should be restored in its entirety. It has been in the tax code since 1913 and is a matter of fundamental fairness under the concept of federalism.”

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.”

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.

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.

Several states have filed suit against the federal government over the state and local tax deduction cap, including New York, New Jersey, Connecticut, and Maryland. In 2017, data from USAFacts put the total amount of taxes deducted using SALT at $104.1 billion.

Media:

• Sponsoring Rep. Josh Gottheimer (D-NJ) Press Release
  
• Countable (Context)
  
• The Daily Signal (Context - Opposed)
  
• USAFacts (Context)
  
• USAFacts (Context)