A heated debate is raging in the Democratic Party, which is undecided between removing the ceiling on SALT (State and Local Tax) deductions or allowing the ceiling to remain at $10,000.
SALT deductions allow taxpayers to deduct the payment of certain state and local taxes from their federal taxes. Under current law, taxpayers can deduct up to $10,000 in federal taxes for payments already made for other local taxes such as property tax, value-added tax, and state income taxes.
Prior to President Donald Trump’s Tax Cuts & Jobs Act, there was no maximum amount in the value of taxes that could be deducted under SALT. In theory, SALT deductions exist to offset some of the taxpayer’s liability for taxes that have already been paid to state and local governments.
In fact, prior to President Trump’s tax reform 91% of the benefits of SALT deductions were claimed by individuals with incomes over $100,000 a year and were concentrated in six states – California, New York, New Jersey, Illinois, Texas, and Pennsylvania.
A Joint Committee on Taxation document showed the SALT deductions cost the federal government approximately $24.4 billion in 2020. According to the Tax Foundation, Democratic states that have benefited the most from SALT deductions.
The Democratic Party divided between keeping the SALT deduction cap or removing it
Senator Bernie Sanders (I-VT) argues that SALT deductions violate the principle of tax neutrality because they disproportionately benefit high-income taxpayers, especially in states with high marginal income taxes such as New York, Connecticut, New Jersey, and California.
Other members of the Democratic Party, concerned about the high tax rates in place for the wealthiest citizens, view SALT as necessary to prevent thousands of investors from migrating to lower-tax states.
Democratic Party representatives such as Bill Pascrell and Josh Gottheimer of New Jersey and Tom Suozzi of New York have said they will not support President Joe Biden’s American Jobs plan unless the $10,000 ceiling on SALT deductions is removed.
Republicans have advocated keeping the deductions, believing that the deductions disproportionately benefit wealthier Democratic states, while their benefits in economic growth are limited.
According to the Tax Foundation, lifting the SALT deductions would not benefit the bottom 40% of the population, and the increase in middle-class income would be only 0.01%.
According to the Tax Policy Center, the tax benefits would be 96% concentrated on higher-income individuals, while the lower-income population would see no benefit from removing the ceiling on SALT tax deductions.
According to the Senate Joint Committee on Taxation fully restoring SALT deductions and eliminating the current ceiling would cost the U.S. Treasury approximately $88.7 billion by 2021 alone.
Repealing the SALT tax deduction ceiling is unlikely to be possible in an individual bill, which is why some Democrats are pressuring the White House to include such a repeal in one of President Joe Biden’s mega public spending plans.