The more generous SALT deduction cap in the tax and domestic policy bill passed by the House worsens the fiscal outlook of the package and provides an unneeded benefit to high earners, the Tax Foundation says.
The House bill increases the deduction for state and local taxes to $40,000 with a $500,000 income phase out and a gradual increase in the cap over 10 years. The foundation says the provision will cost about $320 billion compared with an extension of the existing $10,000 cap.
“The bill is already suffering from a math problem, as the tax cuts add up to over $4 trillion, and spending cuts have been pared back,“ the analysis said. “This is a recipe for worsening deficits at a time when Congress needs to be more concerned about the country’s fiscal outlook.”
Although the SALT caucus, a group of House members mainly from high-tax states, has maintained increasing the deduction is fair, it doesn’t take into account some important facts, the foundation says. One such fact is that the alternative minimum tax (ALT) prevented many taxpayers from taking full SALT deductions before the Tax Cuts and Jobs Act was passed. Also, all but the highest earners got a tax cut from TCJA, even when the SALT cap was considered.
“Under a $40,000 cap with a $500,000 income limit, earners in the 95th to 99th income percentiles would see a 0.6 percent relative increase in after-tax income … the bottom 80 percent of earners would see no benefit,” the analysis says.
Raising the SALT cap “would undercut the TCJA’s long-term legacy, worsening the fiscal outlook of the tax package and providing an unneeded benefit to higher earners,” it added.
Instead, lawmakers should consider limiting the increase to pay for broader reforms to the tax code. Read the full analysis here.
