Republican lawmakers are struggling to resolve an intra-party debate over the amount of state and local taxes that taxpayers can deduct from their federal tax liability as they put together a sweeping tax and spending package.
The debate over the deduction, known as SALT, is pitting blue-state House Republicans determined to expand the tax break against fiscal conservatives who want to continue to limit the size of the deduction.
Republicans need to find a compromise that is acceptable to both sides if they hope to pass President Trump’s “big, beautiful bill.”
The SALT deduction is only claimed by the roughly 10% of taxpayers who itemize, meaning the 90% who claim the standard deduction do not benefit from it.
Currently, taxpayers can deduct up to $10,000 of state and local taxes paid from federal taxable income. Itemizers have to choose between deducting state and local income taxes or sales taxes, but can also deduct property and real estate taxes.
The House-passed version of the Trump agenda bill would raise the amount of deductible state and local taxes paid to $40,000 — far more than most taxpayers pay, but an increase that will benefit residents of high-tax states like New York and California.
The amount of savings under the higher cap would vary, based on which tax bracket a filer is in and how much state and local taxes they have to deduct. For a taxpayer in the 32% bracket earning between $197,300 and $250,525 with at least $40,000 worth of SALT to deduct, under the House’s proposal, they would save $12,800 on their taxes. That’s compared to $3,200 in savings with the current law SALT cap of $10,000, according to an example provided by nonpartisan The Tax Foundation.
The idea behind the SALT deduction, created in 1913 when the federal income tax was established, is to prevent double taxation. But nonpartisan tax analysts say the SALT deduction is a regressive tax that disproportionately benefits the wealthy.
The House-passed bill included a shaky agreement on SALT, brokered between GOP leaders in that chamber and blue-state Republicans from New York, New Jersey and California who were threatening to vote against the measure without adequate SALT relief for their highly taxed constituents.
The measure quadrupled the existing $10,000 cap on the SALT deduction — enacted in 2017 as a revenue raiser to help offset Mr. Trump’s first-term tax cuts — to $40,000. For taxpayers who earn more than $500,000 annually, the amount phases down to the current law level, although both the cap and income limit would increase by 1% each year to help guard against inflation.
The House bill does curtail the SALT deduction for taxpayers in the top income bracket and limits it for some pass-through businesses, but tax analysts say the benefits of lifting the $40,000 cap still go to the highest earners.
“The top 20 percent of taxpayers would be the only group to meaningfully benefit” from lifting the cap to $40,000, the Tax Foundation said. “The bottom 80 percent of earners would see no benefit.”
The Bipartisan Policy Center said increasing the cap to $40,000 primarily benefits “six-figure households in high-tax states, including New York, California, New Jersey, and Connecticut.”
Low- and middle-income households would likely not benefit, given that most don’t have anywhere close to $40,000 in SALT liability, the BPC said.
Most House fiscal hawks reluctantly voted for the “big, beautiful bill,” despite opposing the increase in the SALT cap. But Senate Republicans, none of whom represent the blue states that are most impacted, want to lower the SALT cap before passing the package through their chamber.
“We believe as a matter of policy, you don’t want to have low-tax states subsidizing high-tax states,” Senate Majority Leader John Thune, South Dakota Republican, said on “Fox News Sunday.”
Mr. Thune said he is confident GOP lawmakers will find a “compromise position” on SALT that can pass both chambers.
The Senate Finance Committee released text for the tax portion of the bill Monday that used the current law’s $10,000 cap on SALT as a placeholder, until that compromise position is reached.
The Joint Committee on Taxation scores the SALT changes in the House bill as a revenue raiser because, under current law, the $10,000 SALT cap is set to expire at the end of the year.
Preventing a return to an unlimited SALT deduction and capping it at $40,000, along with the other limitations to the deduction in the House bill, would raise $787 billion over 10 years, the JCT projects.
However, the Senate is planning to use an alternative scoring method known as a “current policy” baseline, which would assume any expiring tax provisions are extended. Thus, any increase in the SALT cap scores as a revenue loser under the Senate’s method.
Rep. Mike Lawler, New York Republican, warned in a statement Monday that if the Senate reduces the SALT cap, he will vote against the Trump agenda bill, and it “will fail in the House.” He said he “will not accept a penny less” than the previously negotiated $40,000 cap.
“I, along with my fellow SALT Caucus members, are actively engaging with Senators, House Leadership, and the White House and am confident the deal as previously negotiated will be in the final bill that is signed into law,” Mr. Lawler said.
GOP Reps. Nick LaLota and Andrew Garbarino of New York, Tom Kean of New Jersey and Young Kim of California are likewise demanding the cap remain at $40,000. Collectively, they could sink the bill in the House because GOP leaders can afford no more than three defections.
Mr. Lawler is fighting for the higher cap because he represents a suburban district north of New York City where taxpayers pay high state and local taxes.
Putnam County, one of the four counties he represents in New York’s 17th District, ranked second among all counties in 2020 for SALT deductions claimed per itemizing taxpayer, according to a Tax Foundation analysis of IRS data.
The average SALT deduction in Putnam County that year was $9,320. But itemizing taxpayers reported an average of $25,238 worth of SALT, meaning they could have deducted more had the $10,000 cap not been in place.
“Quadrupling the SALT cap will be a lifeline for the teachers, nurses, small-business owners and first responders who keep our communities strong, and for all of the working-class families and retirees on fixed incomes across the Hudson Valley,” Mr. Lawler wrote in a New York Post op-ed.
“For those who falsely claim lifting the SALT cap was only a tax cut for the rich, that’s a bunch of bull,” he said. “Over 93% of Hudson Valley home and business owners will see a tax cut if this bill is signed into law.”
• Lindsey McPherson can be reached at lmcpherson@washingtontimes.com.