How a change to the SALT cap would affect taxpayers by state

Raising the cap on state and local tax deductions to $80,000 from $10,000 would reduce the federal income tax liability by $55.9 billion in 2021, making it less concentrated among those with the highest incomes and making it $35.3 billion cheaper for the government than repealing the SALT cap altogether.

That was the takeaway from a new report by Donald J. Boyd, principal of Boyd Research LLC and co-director of the State and Local Government Finance Project at the University at Albany and Matt Jensen, director of the Open Source Policy Center at the American Enterprise Institute.

The $10,000 SALT cap currently in place was set by the 2017 Tax Cuts and Jobs Act passed by Republicans. The $80,000 proposal is being advanced by Democrats in the Build Back Better reconciliation bill.

“Taxpayers in high tax states including California and several states in the northeast were most affected by the cap, particularly those in upper income ranges and they would benefit most from full cap repeal,” the report said. “If Congress raises the cap to $80,000 as currently is being discussed, high income taxpayers in high-tax states would benefit the most, but relatively less than they would benefit from full cap repeal.”

While the change in tax liability is skewed toward the upper income brackets and states with higher taxes, raising the SALT cap to $80,000 “would reduce the revenue loss, make it less concentrated among the highest income households and spread the tax revenue slightly more broadly across states,” the report said.

If the SALT cap were raised to $80,000, as is currently proposed, 20% of the reduction in tax liability would go to taxpayers with adjusted gross incomes of $1 million or more and 63% would go to taxpayers with incomes between $200,000 and $1 million, the report said.

Taxpayers within the $500,000 to $1 million income group would see the largest tax cut as a percentage of disposable income, or 24.6% of the total change in tax liability. Overall average tax reduction, including taxpayers with no tax reduction, would be $656 per tax return and taxpayers with incomes of $1 million or more would see an average reduction of $17,000, the report said.

“The average change in tax liability would be skewed towards upper incomes,” the report said.

Taxpayers in California would see the largest deduction, knocking off $12.5 billion or 22.3% collectively from the $55.9 billion national tax deduction. Trailing behind by almost half is New York ($6.9 billion), then New Jersey ($3.7 billion) and Illinois ($2.7 billion), receiving 46% of the national tax deduction. The median tax deduction by state is $418.8 million.

“Average tax reductions with positive liabilities range from $1,338 in Connecticut to $61 in Alaska,” the report said. States that would see little benefit from the SALT cap raised to 80,000 include Alaska, Wyoming and North and South Dakota.

The difference between raising the cap to $80,000 and repealing seems to only affect those taxpayers with adjusted gross incomes of $1 million or more.

“The $17,411 average tax reduction for those with at least $1 million of income is 75% less than the $70,682 tax cut we estimate under full repeal,” the report said.

Sen. Bernie Sanders, I-Vt., and Sen. Bob Menedez, D-N.J., proposed their own SALT overhaul that would focus more on easing pressure on the middle class while leaving the tax in place for top-income earners. Their plan would keep the $10,000 cap in place for families with at least $400,000 in income.

Senate majority leader Chuck Schumer outlined his proposal last week to eliminate the cap for five years and reinstate the $10,000 cap in 2026.

“Whether Congress will alter the SALT cap remains to be seen,” the report concluded.