• Introduction

• Contents

• Introduction
SALT Cap Mechanics and Revenue Effects
• Effects Effect on State and Local Governments
• Relevant State and Local Actions Since 2018
Distributional Effects
• Distribution Across States and Congressional Districts
• Localities
• Distribution Across Income Levels
• Interaction of Income and State and Local Jurisdictions

Tables

• Table 1. Projected Revenue Losses from the SALT Deduction
• Table 2. SALT Deduction Activity by State, Tax Year 2022
• Table 3. SALT Deduction Activity by Adjusted Gross Income (AGI), Tax Year 2022
• Table 4. Estimated Income Distribution of SALT Deduction Benefit, 2017 and 2024
• Table 5. Illustrative Example: State and Local Tax Rates and SALT Cap Effects
• Table 6. SALT Deduction Activity Among Filers with $50,000-$99,999 in Adjusted Gross Income, Tax Year 2022, Selected States
• Table A-1. SALT Deduction and Cap Activity by Congressional District, Tax Year 2022

Appendixes

• Appendix. SALT Deduction and Cap Activity by Congressional District, Tax Year 2022

Summary

Taxpayers who itemize their deductions may reduce their federal income tax liabilities by claiming a deduction for certain state and local taxes (SALT) Distribution Across Income Levels
• State Responses to the SALT Cap
• Legislation in the 116^th Congress

Taxpayers who elect to itemize their deductions may reduce their federal income tax liability by claiming a deduction for certain state and local taxes paid, often called the "SALT deduction." The 2017 tax revision (paid, often called the "SALT deduction." The 2017 tax revision (P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act, TCJA; P.L. 115-97 or TCJA) made a number of changes to the SALT deduction. Most notably, the TCJA established a limit, or "SALT cap," on the amounts claimed as SALT deductions for tax years 2018 through 2025. The SALT cap is $105,000 for singlemarried taxpayers and married couples filing jointly and $5,000 for married taxpayers filing separately.

filing separately and $10,000 for all other filers. The changes enacted in the TCJA willhave considerably affectaffected SALT deduction activity in the next several years. The increased value of the standard deduction (roughly doubling from its pre-TCJA value for tax years 2018 through 2025), along with the reduced availability ofincreased limitations on SALT and other itemized deductions, are projected tohave significantly reducereduced the number of SALT deduction claims made in those years. The percentage of tax returns with any SALT claim decreased from 31% in tax year 2017 (the last year before the SALT cap became effective) to 9% of all returns in tax year 2022. The Joint Committee on Taxation (JCT) projected that repealing that SALT cap for tax year 2019 would increase federal revenues by $77.4 billion.

The SALT deduction reduces the cost of state and local government taxes to taxpayers because a portion of the taxes deducted is effectively paid for byprojects that following the SALT cap's scheduled expiration, federal revenue losses attributable to SALT will increase from $23 billion in FY2025 to $197 billion in FY2027. The SALT deduction shifts some of the burden of state and local taxes from taxpayers to the federal government. By reducing the deduction's value, the SALT cap therefore increases the cost to the taxpayer of state and local taxes to taxpayers. That may affect state and local tax and spending behavior, as any reductionreductions in state and local revenues from increased sensitivity to SALT-eligible tax rates must be offset by reductions in outlays or increases in other revenuerevenues to maintain budget outcomes.

The SALT cap's effectThe estimated reduction in federal revenues from the SALT deduction declined from 7.7% of all state and local government tax collections from SALT-eligible taxes in 2017 to 1.3% in 2022.

Following enactment of the TCJA, several states proposed or passed legislation that provided possible avenues to reduce the SALT cap's effect on taxpayers without reducing their state or local tax burdens. A 2020 Internal Revenue Service (IRS) regulation clarified that pass-through businesses may claim SALT deductions in states where the tax burden is shifted from individual owners to the business as an entity, essentially excluding that income from the SALT cap in states using this "pass-through workaround." Prior IRS guidance had eliminated state and local use of charitable donations tax rules that could otherwise shield residents from the SALT cap.

The SALT cap predominantly affects taxpayers with higher incomesIRS data from 2022 showed that the nationwide difference between eligible SALT taxes (before the cap was applied) was about $16,600 higher, on average, than the value of the (after-cap) SALT deduction. That average, however, belies considerable variation across geographic areas: the comparable value in the state with the greatest difference (New York, $43,200) was more than 20 times that in the state with the lowest difference (Alaska, $1,900). The SALT cap predominantly affects high-income taxpayers. State and local tax payments tend to increase with income, both as a direct function of the income tax structure and because higher incomes lead to increased consumption and thus sales and property tax payments. Increased income, therefore, makes higher-income taxpayers more likely to make SALT-eligible tax payments in amounts exceeding the SALT cap value. The benefit of SALT deductions in terms of tax savings is also larger for taxpayers with higher incomes because a federal tax deduction's value is proportional to the taxpayer's marginal income tax rate. JCT projected that more than half of 2019 benefits for the SALT deduction will accrue to estimates that taxpayers with incomes exceedingof $200,000 or more will represent 12% of all tax units and receive 65% of the SALT deduction's tax benefits in 2024, while individuals and couples with incomes under $50,000 represent 53% of all tax units and claim less than 1% of SALT benefits. Areas that are most affected by the SALT cap generally also tend to have larger SALT cap effects on middle-income taxpayers.

Introduction

Taxpayers who elect to itemize their deductions may reduce their federal income tax liability by claiming a deduction for certain state and local taxes paid, often called the "SALT deduction." The 2017 tax revision (paid, often called the "SALT deduction." The 2017 tax revision (P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act, TCJA; P.L. 115-97 or TCJA) established a temporary $10,000 limit, or "SALT cap," on annual SALT deduction claims. By limiting the amount of of $5,000 for married taxpayers filing separately and $10,000 for all other filers. By limiting the SALT deduction, the SALT cap increases the tax liabilityliabilities of certain taxpayers, which increases federal tax revenues relative to what otherwise would have been collected without a limitation in place. The SALT cap's effect on tax liability varies significantly with taxpayer income and with state and local tax rates. A number of bills introduced in the 116^th Congress would modify the SALT cap, and federal regulatory efforts responding to related state and local government activity are ongoingWith the SALT cap and other temporary TCJA provisions scheduled to expire at the end of 2025, there has been substantial discussion regarding the merits of keeping or modifying the cap. This report discusses the SALT cap's features,mechanics; analyzes its potential impact, for different taxpayers, states, and localities; and summarizes recent legislationlegislative and regulatory action to modify the cap.

Cap Mechanics and Revenue Effects

developments pertinent to the SALT cap. A snapshot of SALT deduction and SALT cap activity across congressional districts in tax year 2022 can be found in Table A-1 of the Appendix. SALT Cap Mechanics and Revenue Effects Under current law, taxpayers itemizing deductions (in lieu of claiming the standard deduction) may reduce their taxable incomeincomes by claiming the SALT deduction for certain state and local taxes paid during the tax year. The state and local taxes eligible for the SALT deduction are income taxes, general sales taxes (claimed in lieu of income taxes), personal property taxes, and certain real property taxes not paid in the carrying on of a trade or business.¹

For taxpayers who would have itemized their deductions without access to the SALT deduction, it generates tax savings equal to the amount deducted multiplied by the taxpayer's marginal income tax rate. For example, a taxpayer with $206,000 of eligible state and local taxes and a top marginal tax rate of 3537% would save $7,0002,220 from the SALT deduction (i.e., $206,000*0.3537). For taxpayers who would have claimed the standard deduction without access to the SALT deduction, it generates tax savings equal to the difference between their tax liability if they had claimed the standard deduction and their total tax liability with itemized deductions (inclusive ofincluding the SALT deduction).² the SALT deduction). (Throughout this report, the tax savings attributable to the SALT deduction is also referred to as the benefit from the deduction.)

The TCJA established a temporary SALT cap for tax years 2018 through 2025. The SALT cap is set atto $10,000 for singleall taxpayers orexcept married couples filing jointly and $5,000 for married taxpayers filing separatelytaxpayers filing separately, for which it is $5,000. By limiting the SALT deduction available to certain taxpayers, the SALT cap decreases the tax savings associated with the deduction relative to prior law, thereby increasing federal revenues.

The TCJA also changed a number of tax code features (e.g., standard deduction amounts, marginal tax rates)² that indirectly affect SALT deduction eligibility and the value of the tax savings it generates. The TCJA roughly doubled the standard deduction and limited other itemized deductions.³ The TCJA also prohibited SALT deduction claims on taxes paid on foreign real property for tax years 2018 through 2025.⁴

3 The SALT cap, the increased value of the standard deduction, and other tax changes enacted by the TCJA have both (1) reduced the number of taxpayers claiming the SALT deduction; and (2) reduced the total tax benefit provided to taxpayers who claim a SALT deduction and the total tax savings from those claims. Table 1 shows the most recent estimates of reductions in federal revenues attributable to the SALT deduction for FY2017, the last full year before enactment of P.L. 115-97, and FY2019 through FY2023.⁵ Revenue losses from the SALT deduction in FY2017 ($100.9 billion) nearly equaled the total losses projected from FY2019 through FY2023 ($117.2 billion). The Joint Committee on Taxation (JCT) projects that 16.4 million taxpayers will claim a SALT deduction for tax year 2019,⁶ compared to 46.6 million taxpayers who the Internal Revenue Service (IRS) reported claiming the deduction in 2017.⁷

Recent research has estimated the SALT cap's effect on SALT deduction claims independent of other tax changes enacted through the TCJA. A 2019 Treasury Inspector General report examined the SALT cap's hypothetical effect had it been imposed in tax year 2017, prior to the other TCJA changes taking effect.⁸ The report found that the cap would have reduced SALT deduction benefits for 10.9 million taxpayers (about 25% of all households claiming the deduction) and reduced deduction amounts by $323 billion, or just over half of the actual amounts deducted in that year.⁹ In June 2019, JCT estimated that holding all other portions of the tax code constant, repealing the SALT cap for tax year 2018 would decrease FY2019 federal revenues by $77.4 billion.¹⁰

Effects on State and Local Governments

Response to the SALT cap could be a function of its salience, that is, the public awareness of its effect on tax liability.¹² SALT cap salience may depend on awareness of the state and local taxes themselves, which can vary significantly across tax system features.¹³ Salience for taxpayers who take the standard deduction, but who would be better off itemizing deductions if not for the SALT cap, may be particularly low, as the SALT cap's effects may not be apparent in tax filing software. Taxpayers could also have difficulty differentiating SALT cap-related liability changes from other changes enacted through the TCJA.

State and local governments are generally limited in their ability to respond to shifts in demand for government services withfrom FY2024 through FY2028.⁴ (Because fiscal years run from October 1 of the previous calendar year to September 30 of the given year, FY2027 is the first full fiscal year after the SALT cap and other temporary TCJA provisions are scheduled to expire.)⁵ Revenue losses from the SALT deduction in FY2027 are projected to be $197 billion, more than eight times the projected revenue loss in FY2025 ($23 billion), the last full fiscal year for which the SALT cap is in effect. Internal Revenue Service (IRS) data show that only 9% of all taxpayers claimed a SALT deduction in tax year 2022, less than one-third the share from 2017 (31%), the final year before the SALT cap took effect.⁶ Table 1. Projected Revenue Losses from the SALT Deduction

(in billions of dollars)

The SALT deduction provides state and local governments with an increased ability to levy taxes by "discounting" (reducing the after-federal-tax cost of) state and local taxes to taxpayers. By limiting the deduction's benefits, the SALT cap increases the cost (or "price") of state and local taxes for affected taxpayers.

For example, consider a taxpayer with itemized deductions, a 35% marginal tax rate, and $20,000 in eligible SALT payments. Without the SALT cap, the net price of those taxes for the taxpayer would be $13,000 (or $20,000*[1-0.35]), as the taxpayer can use the SALT deduction to reduce their federal taxes by $7,000. When a $10,000 SALT cap is imposed, the final price of those taxes rises to $16,500 (or $10,000 + [$10,000*(1-0.35)]).

State and local governments raised a combined $1.8 trillion in individual income taxes, general sales taxes, and property taxes in 2022, an average of about $11,600 per federal income taxpayer.⁷ State governments collected $1.0 trillion (56%) of that total, including the majority of the income and sales taxes. Local governments collected the remaining $0.8 trillion (44 %), including the majority of property taxes.⁸ There is considerable geographic variation in the rates at which taxes are levied, and in the incomes and prices to which those taxes apply.

Aggregate data suggest that the SALT cap and other TCJA changes had a considerable effect on the nationwide discount that the SALT deduction provides to state and local taxes. The JCT estimated that in FY2017, the last year before the SALT cap and TCJA took effect, the SALT deduction reduced federal revenues by $101 billion, or 7.7% of all state and local government tax collections from general sales, individual income, and property taxes in the 2017 tax year.⁹ In 2022, the $23 billion reduction in federal revenues attributable to the SALT deduction represented 1.3% of the comparable total from those tax sources.¹⁰

The basic economic law of demand—there is an inverse relationship between the price of a good and the quantity demanded—suggests that by increasing the price of state and local taxes, the SALT cap causes a decline in demand for state and local government activity. The size of the decline is a function of the sensitivity of public desire for state and local services, paid for by taxes, to changes in the prices of those services (i.e., the elasticity of demand). Research has found that state and local governments respond to federal tax changes with shifts in their own tax and spending practices.¹¹

Distributional Effects

Distribution Across States and Congressional Districts

revenues with reductions in spending or increases in other revenue sources. Relevant State and Local Actions Since 2018

State and local responses to the SALT cap have varied across units of government. Some governments changed their tax codes to reduce the SALT cap's effects on their taxpayers, while others have taken legal action against the federal government. Federal and legal responses to those actions upheld the legality of the SALT cap and prohibited use of the "charitable workaround" that was designed to reduce SALT cap exposure, but allowed the "pass-through workaround" as a means of reducing the effects of the SALT cap.

The "charitable workaround" describes laws enacted in certain states that provided taxpayers a credit against state taxes for charitable donations to state entities, which would then be eligible for the federal charitable deduction under Section 170 of the Internal Revenue Code. The IRS has since issued a final ruling limiting the availability of Section 170 charitable deductions in such a way that would render the new charitable activity ineligible.¹⁵

Several states also took legal action related to the SALT cap following TCJA enactment, filing suit against the U.S. government in July 2018 and challenging the cap's constitutionality.¹⁶ A September 2019 federal district court ruling upheld the SALT cap's constitutionality, asserting that it did not unconstitutionally penalize certain jurisdictions.¹⁷

Other state actions to provide a so-called "pass-through workaround" more effectively reduced SALT cap exposure. The SALT cap does not limit SALT deductions associated with the carrying on of a trade or business, so taxpayers whose SALT tax payments are based on pass-through business income (including income from S corporations and partnerships) may not be subject to the SALT cap in the same manner as other taxpayers.¹⁸ Certain state governments have adjusted for this activity by enacting laws that levy or raise taxes on the pass-through business entity itself that are offset (holding total tax revenues constant) by tax reductions for the individual income liabilities of pass-through business owners subject to the business entity tax increase.

A 2020 IRS notice clarified that pass-through entity businesses may claim SALT deductions in states where the tax burden is shifted from pass-through business owners to business entities, essentially excluding such income from the $10,000 limitation for affected individual owners.¹⁹ A 2024 review of state activity indicated that 36 of the 41 states with pass-through entity income taxes had enacted legislation intending to limit the SALT cap exposure of such tax payments.²⁰

This section explores features of localities and households that influence the distribution and intensity of SALT cap effects on tax liability.²¹ Available data indicate that the SALT cap's effects vary significantly across state and local jurisdictions and household income.

The SALT cap's effect is in part a function of state and local tax policies. For example, higher effective rates for taxes that qualify for the deduction (income taxes, general sales taxes, real and personal property taxes) would increase the amount of SALT-eligible tax payments for a taxpayer, and therefore increase the probability that they will have SALT deductions that exceed the cap. State and local tax rates could thus affect both the number of taxpayers with higher tax liability due to the SALT cap and the amount of taxes paid above the cap.

Figure 1 shows effective state and local tax rates for all SALT-eligible taxes in each state, calculated as the percentage of total adjusted gross income paid in-state and local general sales taxes, individual income taxes, and property taxes.¹⁸ In 2017, New York (17.2% effective tax rate), Washington, DC (16.9%), Hawaii (16.1%), Maine (15.0%), and Nebraska (14.2%) had the highest combined effective state and local tax rates. Delaware (6.8%), Alaska (7.6%), Florida (7.7%), New Hampshire (8.3%) and Tennessee (8.4%) had the lowest combined tax rates. All else equal, states with higher SALT-eligible effective tax rates are likely to experience greater SALT cap effects on tax liability than states with lower rates.

Figure 1. Effective State and Local Tax Rates, 2017

Source: U.S. Census Bureau, 2017 Annual Survey of State and Local Government Finances, and Internal Revenue Service, SOI Income Tax Stats. Calculations performed by CRS. Notes: Income categories reflect an adjusted gross income (AGI) concept. Tax rates include both income taxes and general sales taxes, while SALT deductions use either income tax general or sales tax payments. Calculations exclude taxpayers with negative income.

Figure 2 plots the average SALT deduction amount for each 2017 congressional district (districts are from the 115^th Congress). The districts with the 20 highest average SALT deductions are located in states with above-average effective tax rates in Figure 1, including New York, California, Connecticut, and New Jersey. Nineteen of the districts with the 20 lowest average SALT deductions are located in Florida, Texas, Tennessee, Alabama, Nevada, Arizona, and Alaska, all states with below-average effective state and local tax rates. Figure 2 shows the potential significance of local tax and economic activity on the SALT cap's effects.

Figure 2. Average SALT Deduction Amount by Congressional District, 2017

Source: Internal Revenue Service, SOI Income Tax Stats. Calculations performed by CRS. Notes: Income categories reflect an adjusted gross income (AGI) concept. Calculations exclude taxpayers with negative income.

Figure 3 adds a layer of analysis by plotting two variables on each congressional district: (1) average adjusted gross income (AGI) of taxpayers and (2) average effective SALT rates. Each district categorized as having low effective SALT rates in Figure 3 had an average AGI below $75,000, and 13 of these districts had average AGI below $50,000. Nineteen of the 20 districts with the highest effective SALT rates had an average AGI above $100,000, and four of the top five districts had an average AGI above $200,000. The distribution of SALT deductions across household income is discussed further in the next section. Figure 3 demonstrates the importance of considering both tax rates and the tax base when examining potential SALT cap effects.

Figure 3. Average Effective SALT Rate and Adjusted Gross Income (AGI) by Congressional District, 2017

Source: U.S. Census Bureau, 2017 Annual Survey of State and Local Government Finances, and Internal Revenue Service, SOI Income Tax Stats. Calculations performed by CRS. Notes: Income categories reflect an adjusted gross income (AGI) concept. Tax rates include both income taxes and general sales taxes, while SALT deductions use either income tax general or sales tax payments. Calculations exclude taxpayers with negative income.

Distribution Across Income Levels

As with other tax deductions, SALT deduction benefits accrue more for higher-income taxpayers than lower-income taxpayers. Two factors explain this pattern: (1) higher incomes directly lead to more state and local income taxes and are correlated with higher sales and property tax payments stemming from greater consumption; and (2) taxpayers with higher incomes are subject to higher marginal tax rates, so each dollar deducted from tax liability results in greater tax savings.

Table 2 shows the JCT projections of SALT benefits by income class in tax years 2017 (the last year before the TCJA took effect) and 2019. Taxpayers with more than $100,000 of AGI received the vast majority of SALT benefits in both 2017 (93%) and 2019 (89%). Taxpayers with income between $50,000 and $200,000 received a larger share of total benefits in 2019 (44%) than 2017 (29%), whereas the opposite trend occurs for taxpayers with more than $200,000 (declining from 71% to 56%). Taxpayers with less than $50,000 received relatively little benefit from the SALT deduction in both years.

Data from Table 2 suggest that the SALT cap increased the federal tax burden of high-income taxpayers. This occurs because the SALT cap (1) reduced the number of taxpayers claiming the SALT deduction, who disproportionately fell in higher income classes; and (2) reduced SALT benefit levels of taxpayers with more than $10,000 in SALT payments, who were particularly likely to have high levels of income.¹⁹ JCT estimated that were the SALT cap eliminated in tax year 2019, more than half of the additional tax benefits would have been claimed by taxpayers with incomes exceeding $1 million.²⁰ The SALT cap's total effect on the combined federal, state, and local tax burden across income levels will depend on the state and local government response to the SALT cap, which is uncertain.

Figure 4 plots the percentage of all tax returns, the percentage of returns claiming SALT deductions, and the percentage of SALT deduction amounts claimed across income levels in tax year 2017, the latest year for which data are available. (The amount of SALT deduction claimed reflects the dollars deducted and not the tax savings associated with the deduction.) Tax returns with AGI exceeding $1 million represented less than 1% of all tax returns, but claimed over 25% of all SALT deduction amounts. Tax returns with over $100,000 in AGI claimed more than 78% of the SALT deduction amounts claimed, while returns with AGI below $50,000 claimed less than 10% of that total.

Figure 4. Percentage of Returns Claiming the SALT Deduction and SALT Deduction Amounts by Income, 2017

Source: Internal Revenue Service, SOI Income Tax Stats. Calculations performed by CRS. Notes: Income categories reflect an adjusted gross income (AGI) concept. Calculations exclude taxpayers with negative income.

The composition of state and local taxes also affects the SALT cap's ultimate effect on taxpayers within a local jurisdiction. Table 3 illustrates how SALT cap burden distribution can differ when the composition of state and local taxes changes while holding total tax revenue constant. In both jurisdictions, total tax revenues are $44,000. In Jurisdiction I, relatively high income tax rates generate higher income tax payments, and the SALT cap burden falls on Tax Units A and B, the taxpayers with higher incomes. In Jurisdiction II, property tax rates are higher than income tax rates, and the SALT cap burden instead falls on Tax Units A and C, the taxpayers with high property values. More of the state and local tax revenue in Jurisdiction II is above the SALT cap, meaning that taxpayers in Jurisdiction II are able to deduct less in SALT deductions

The effect of the SALT cap will also vary based on the degree to which states are dependent on a single revenue source or multiple sources. This is because taxpayers may deduct either their income tax payments or their sales tax payments, but not both. For example, a single individual who pays $8,000 of state income taxes and $8,000 of state sales taxes can deduct $8,000 when paying his or her federal income taxes. By contrast, an individual who pays the same amount of state and local taxes ($16,000) over the course of a year but pays that amount only in the form of income taxes or sales taxes would have $16,000 of SALT-eligible tax payments. The SALT cap will therefore have a more significant effect in states exclusively dependent on income taxes or on sales taxes rather than on both forms of revenue.

Tax Year 2017

Tax Year 2024

Income Class

% of All Returns

% of Itemized Returns

% of SALT Benefit

% of All Returns

% of Itemized Returns

% of SALT Benefit

Less than $50,000

52.7%

12.8%

0.6%

39.9%

5.1%

0.6%

$50,000-$199,999

41.6%

68.0%

28.9%

48.6%

51.4%

34.3%

More than $199,999

5.7%

19.2%

70.6%

11.5%

43.5%

65.1%