Discussions about the state and local tax (SALT) deduction are back. One reason? Lawmakers are prepping major tax reform since Republicans will control the White House and both chambers of Congress in the new year.
The SALT deduction allows taxpayers who itemize to deduct state and local taxes from their federal taxable income. The deduction was capped at $10,000 by the Tax Cuts and Jobs Act (TCJA), ushered in by Donald Trump in his first stint as president of the United States.
Since then, the SALT cap has been a point of contention for many in high-tax states who argue the deduction limit disproportionately affects them.
But it’s important to note that the state and local tax deduction isn’t just an issue for people in so-called “blue states.” And now, one republican lawmaker is saying he won’t support any tax reform that doesn’t lift the cap, while others are reportedly considering doubling the current SALT write-off.
Here’s what all this could mean for you and your tax bill.
The SALT deduction: Key points
The SALT cap was originally introduced to offset tax cuts in the TCJA, signed into law by then-President Donald Trump in 2017. However, the $10,000 cap has faced criticism for placing an undue burden on residents of states with higher taxes, which tend to lean Democratic.
However, the dynamics surrounding the SALT deduction cap are complex, particularly when it comes to how Republican lawmakers see its impacts.
- The SALT cap is often seen as penalizing residents in "blue states" with high state and local taxes. Data show California, Illinois, New Jersey, New York, and Pennsylvania account for most SALT deduction claims. (However, Texas, a "red state," is included in that data set.)
- For example, before the SALT cap, the average SALT deduction in Connecticut was around $20,900 according to the National Association of Realtors. Just after the $10,000 limit was enacted, the average SALT deduction in CT dropped to about $9,700. So, some Connecticut taxpayers saw a nearly 58% deduction decrease.
- However, some Republicans representing those states have become vocal about the need to raise or eliminate the cap. The urgency is heightened because the SALT deduction limit is set to expire at the end of 2025, if Congress doesn't act.
The cost of a SALT cap repeal (more on that below) and questions surrounding who benefits most (Tax Policy Center says high-income earners) are also key issues to be addressed in 2025.
'No SALT, no deal' redo?
Rep. Mike Lawler (R-N.Y.) recently emerged as a key figure in this debate. During an appearance on Bloomberg’s "Balance of Power," Lawler stated he wouldn’t support any tax proposal that doesn’t include the removal of the SALT cap.
He emphasized that his backing and support from other representatives from New York, New Jersey, and California are essential for passing tax legislation. Lawler remarked, "I’ve been very clear. I will not endorse a tax proposal that does not remove the cap on SALT."
It’s also worth noting that Rep. Tom Suozzi (D-N.Y.), also known as "Mr. SALT," has been a prominent advocate for the restoration of the SALT Deduction for some time.
His mantra, "No SALT, no deal," became a rallying cry among some lawmakers from high-tax states.
Suozzi has consistently said he would oppose any tax legislation that doesn't address the SALT cap, arguing that it represents "double taxation" and is a significant financial burden for Long Island and Queens residents.
Trump's 'get SALT back' pledge
Former President Donald Trump has also weighed in. As Kiplinger reported, Trump called for lifting the SALT cap during his 2024 presidential campaign events, stating an intention to "get SALT back."
At the time, those comments brought mixed reactions. Some viewed it as a necessary pivot for constituents in high-tax states, while others criticized him for previously supporting the very legislation that imposed the cap.
For example, Senate Majority Leader Chuck Schumer (D-N.Y.) has long opposed the SALT cap and criticized Trump’s campaign comments as politically motivated. Other Democratic representatives also expressed skepticism about Trump's sincerity in addressing an issue he previously exacerbated.
What about the cost? Eliminating the SALT cap could cost an estimated $1.2 trillion over ten years according to the Committee for a Responsible Budget. That price tag raises concerns among some fiscal conservatives about federal revenue and deficit reduction.
So, Lawler's and now President-elect Trump’s comments underscore another key issue in the upcoming debate over tax reform: fiscal responsibility. The Congressional Budget Office (CBO) has estimated that just making the TCJA permanent (a big item on Trump’s tax wish list) could cost $4 trillion over ten years.
As preliminary negotiations and positioning begin in Congress regarding new tax legislation, it remains to be seen whether raising or repealing the SALT cap will be part of any final product. (Several options to deal with the SALT deduction, beyond full reinstatement, are floating around with varied projected budget impacts.)
For instance, Economist Stephen Moore, a Trump transition team member, reportedly told Bloomberg that a possible increase of the SALT deduction to $20,000 has been discussed.
So, stay tuned.
