Contents

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

Summary

Taxpayers who itemize their deductions may reduce their federal income tax liabilities by claiming a deduction for certain state and local taxes (SALT) paid, often called the "SALT deduction." The 2017 tax revision (P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act 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 $5,000 for married taxpayers filing separately and $10,000 for all other filers.

The changes enacted in the TCJA have considerably affected SALT deduction activity. The increased value of the standard deduction (roughly doubling from its pre-TCJA value for tax years 2018 through 2025), along with increased limitations on SALT and other itemized deductions, have significantly reduced the number of SALT deduction claims. 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) projects 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 increases the cost of state and local taxes to taxpayers. That may affect state and local tax and spending behavior, as reductions in state and local revenues from increased sensitivity to SALT-eligible tax rates must be offset by reductions in outlays or increases in other revenues to maintain budget outcomes. The 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 effect of the SALT cap on the SALT deduction's value is in part a function of state and local tax policies. Nationwide, there is considerable variation in both the combined level of income and sales taxes levied by states and the property taxes and other charges levied by local governments. Differences in incomes and price levels that serve as the bases for those taxes are another source of disparity in SALT cap exposure. IRS 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. 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 estimates that taxpayers with incomes of $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 itemize their deductions may reduce their federal income tax liabilities by claiming a deduction for certain state and local taxes (SALT) paid, often called the "SALT deduction." The 2017 tax revision (P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act or TCJA) established a temporary limit, or "SALT cap," on annual SALT deduction claims 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 liabilities 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. With 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 mechanics; analyzes its potential impact for different taxpayers, states, and localities; and summarizes recent legislative and regulatory 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 incomes 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 $6,000 of eligible state and local taxes and a top marginal tax rate of 37% would save $2,220 from the SALT deduction (i.e., $6,000*0.37). 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 (including the SALT deduction).²

The TCJA established a temporary SALT cap for tax years 2018 through 2025. The SALT cap is set to $10,000 for all taxpayers except married taxpayers 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, thereby increasing federal revenues.

The TCJA also changed a number of tax code features (e.g., standard deduction amounts, marginal tax rates) 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. The TCJA also prohibited SALT deduction claims on taxes paid on foreign real property for tax years 2018 through 2025.³

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. Table 1 shows the most recent estimates of reductions in federal revenues attributable to the SALT deduction from 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

Effect on State and Local Governments

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

Response to the SALT cap could also be a function of its salience, or 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 may be particularly low for taxpayers who take the standard deduction, but who would be better off itemizing their deductions if not for the SALT cap, 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 through changes in fiscal outcomes (i.e., increased deficits or reduced surpluses). Unlike the federal government, which has no enforceable balanced-budget requirement, most state and local governments are statutorily required to balance operating revenues and operating expenses over a one- or two-year period.¹⁴ Governments with a binding balanced-budget requirement would therefore need to match any reduction in SALT 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

Distributional Effects

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.

Distribution Across States and Localities

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.

Differences in local incomes and price levels are another determinant of the SALT cap's effect. Wages and prices are the bases against which state and local governments levy SALT-eligible income, sales, and property taxes. Consider two households that are in separate localities and have different incomes but the same tax rates and the same purchasing power (i.e., the same "real" income). In other words, adjusting for their local price levels, each household is able to purchase the same amounts of goods and services. Although each household faces the same set of purchasing options on the public and private markets, the higher-income household facing higher price levels is more likely to have SALT payments in excess of the SALT cap.

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.

A snapshot of the state-level variation of the SALT cap's effects can be seen in Table 2. The rightmost column of that table shows the difference in the average SALT-eligible taxes claimed by filers taking the deduction before the cap was applied and the final value of the SALT deduction claim; this is a proxy for the SALT cap's effect on average SALT deduction levels.²² (This difference is measuring changes in taxable income rather than the final tax benefit.) Nationwide, that difference was about $16,600 per SALT claimant in tax year 2022, but there was considerable variation in the value across states, with the highest state value (New York, at $43,200) being more than 20 times greater than the lowest state value (Alaska with $1,900). More generally, Table 2 shows great state-level variation in the share of filers claiming the SALT deduction across states, with the share in the highest area (DC at 20.4%) almost five times as large as the share in the lowest area (South Dakota at 4.4%).

Distribution Across Income Levels

As with other tax deductions, the SALT deduction benefits high-income taxpayers more than low-income taxpayers. Three factors explain this pattern: (1) higher incomes lead to more state and local income taxes, and are correlated with higher sales and property tax payments stemming from higher spending; (2) filers with higher incomes tend to benefit more from other itemized deductions, making itemization (and SALT deduction eligibility) more likely; and (3) taxpayers with higher incomes are subject to higher marginal tax rates, so each dollar deducted from tax liability results in greater tax savings.

Table 3 includes some of the same SALT deduction concepts shown in Table 2, but instead focuses on how those measures change across levels of taxpayer income. The difference between SALT-eligible taxes claimed before application of the SALT cap and the final SALT deduction taken was $47,900 for the average SALT claimant with adjusted gross income (AGI) above $200,000 in tax year 2022. This is more than 15 times as high as that of the average claimant with AGI between $50,000 and $200,000 ($2,700) and more than 50 times as high as the average claimant with AGI of less than $50,000 ($800).²³ Similarly, the share of all taxpayers in each income category claiming a SALT deduction increased with income, from 2% of filers with less than $50,000 of AGI to 39% for filers with $200,000 or more.

Table 4 shows the JCT projections of SALT deduction tax benefits (rather than the deduction amounts provided in Table 3) by income class in tax years 2017 (the last year before the TCJA took effect) and 2024. Taxpayers with more than $200,000 of AGI received the majority of SALT benefits in both 2017 (71%) and 2024 (65%), though taxpayers with income between $50,000 and $200,000 received a larger share of total benefits in 2024 (34%) than in 2017 (29%). Taxpayers with less than $50,000 received relatively little benefit from the SALT deduction in both years.

Interaction of Income and State and Local Jurisdictions

The composition of state and local taxes also affects the SALT cap's ultimate effect on taxpayers within a local jurisdiction. Table 5 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 hypothetical 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 higher property values. More of the state and local tax revenue in Jurisdiction II is above the SALT cap, so with local tax revenues being the same, taxpayers in Jurisdiction II are able to deduct less on their federal income tax returns. This analysis highlights the importance of state and local tax structure in determining the SALT cap's effect on taxpayer liability even when holding the average level of taxes constant. This also has important intergenerational effects, as individuals and families exhibit different earning, spending, and homeownership behaviors as they age. For example, sales taxes fall disproportionately on retirees, who often spend above their incomes (as they draw down on their savings), while income taxes fall disproportionately on workers in their prime earning years.

Table 6 illustrates how geographical jurisdictions and income can interact in determining the SALT cap effect on taxpayers. The table shows SALT deduction activity for filers with AGIs between $50,000 and $100,000 in the states with the five highest and five lowest differences between precap SALT taxes claimed and the final SALT deductions taken.²⁴ The overall SALT claimant shares among filers in this income category were relatively constant across both sets of states, ranging from 20% to 27% in the "high difference" states and 21% to 23% in the "low difference" states. The proxy for the SALT cap effect, however, was much higher in the "high difference" states (a median value of $1,900) than in the "low difference" states (a median of $600). In other words, middle-income SALT claimants from high-tax states were therefore more likely to be affected by the SALT cap than middle-income SALT claimants from low-tax states.

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

Table A-1 provides congressional district-level data on the measures of SALT deduction and cap activity, and their effects on tax liability, that were shown in Table 2. As with that table, the difference between the SALT-eligible taxes claimed before the SALT cap and the final SALT deduction claimed is a proxy for the effect of the SALT cap. It is not a precise measure of the cap's impact on tax liability. More precisely, final SALT deduction values will also include tax changes from other years and other relatively small factors that do not contribute to the SALT-eligible taxes total. This value also inherently does not capture any effects of the SALT cap on taxpayers who claimed the standard deduction in tax year 2022 but who would have itemized their deductions and claimed a SALT deduction if the SALT cap were not in effect that tax year.

Data shown in Table A-1 are from the IRS Statistics of Income by Congressional District dataset, which uses the congressional districts in effect as of the 117^th Congress.