David Trimmer is a staff writer and a second-year MPA student.

Introduction

On February 8, 2023, Congress’s Bipartisan SALT Caucus relaunched with the hope of repealing the cap on the State and Local Tax (SALT) deduction. The SALT deduction allows taxpayers to deduct the money they paid in state and local taxes from their federal taxable income. The Tax Cuts and Jobs Act, signed into law by former President Donald Trump in 2017, prevents households from deducting more than $10,000 in state and local taxes annually. The $10,000 limit is set to expire in 2026. 

The representatives in the SALT Caucus argue that repealing this cap will put money back in the pockets of middle-class families. While they may be partly correct, they fail to mention that most of the benefits would flow to the wealthiest Americans. Repealing the SALT cap would overwhelmingly benefit the top 5% of Americans while offering little support to the working class. 

The Regressive Nature of Deductions

Deductions generally benefit people who are in higher tax brackets. The American income tax system is progressive; taxpayers who make more money are taxed at a higher rate than those who make less. However, deductions – which allow taxpayers to reduce their taxable income, and therefore lower their tax liability – have a regressive effect as taxpayers with higher incomes benefit more than those with lower incomes. For example, this analysis from the Tax Foundation shows that if someone in the 12% tax bracket deducts $1,000 from their taxable income, they reduce their tax liability by $120. However, if someone in the 35% tax bracket deducts $1,000 from their taxable income, they reduce their tax liability by $350.

The SALT deduction, even with the $10,000 limit, benefits wealthier families more than working-class families. Rich households pay more in state and local taxes than poorer households, and, therefore, are able to reduce their tax liability by a higher amount. In 2019, 78% of the benefits from the SALT deduction went to the top 20% of taxpayers. As the below graphic from the Center on Budget and Policy Priorities demonstrates, if the SALT cap is repealed, the disparity will grow further as 82% of the benefits would go to the top 5% of taxpayers. Additionally, 56% of the benefits would go to the top 1%; the bottom 80% would only receive 4% of the benefits.

^{Source: Center on Budget and Policy Priorities}

Few Americans – Typically Top Earners – Itemize Their Deductions

For households to take advantage of the SALT deduction, they must choose to itemize their deductions. In the American tax system, taxpayers can either itemize their deductions or take the standard deduction. Itemized deductions include the SALT deduction as well as deductions for charitable contributions and mortgage interest, among others. The standard deduction, on the other hand, is a flat amount. For the 2022 tax year, the standard deduction is $12,950 for a single filer and $25,900 for couples filing jointly. Most Americans take the standard deduction since the sum of their itemized deductions is lower than the standard deduction. Therefore, those who take the standard deduction see no benefit from the SALT deduction. The Tax Cuts and Jobs Act incentivized even more Americans to take the standard deduction by doubling it and restricting itemized deductions, like limiting the SALT deduction to $10,000. In 2018, only 11.4% of taxpayers itemized their deductions. The few taxpayers who do itemize their deductions are typically in the top income quintile.

Even if the deduction changes from the Tax Cuts and Jobs Act are reversed or expire as planned in 2026, less than a third of Americans would itemize their deductions. Over two-thirds of Americans would still see no benefit from repealing the SALT cap since they would still take the standard deduction. On the other hand, the Center on Budget and Policy Priorities projects that almost 80% of households in the 95% to 99% income group and over 90% of households in the top 1% would benefit from the cap being repealed (see Figure 2 below). 

^{Source: Center on Budget and Policy Priorities}

Universal Child Benefit > SALT Deduction

Even if the SALT Caucus fails to repeal the SALT cap, the $10,000 limit is set to expire in 2026. If the cap disappears, the cost of the SALT deduction will jump from around $23 billion to $156 billion per year, with the vast majority of money going into the pockets of the wealthiest Americans. However, it is possible to provide tax relief to working-class families without transferring the bulk of the benefits to the country’s top earners. For example, the expanded Child Tax Credit (CTC) in 2021 sent monthly payments to lower and moderate-income families with children. The provision reduced child poverty by 46%. Since the expanded CTC lapsed, the benefit was reduced from a maximum of $3,600 to $2,000. In 2026, it will again decrease to $1,000, further diminishing benefits for millions of working families with children.

Instead of sending over $100 billion to wealthy families through the SALT deduction, Congress should build off of the success of the expanded CTC and create a universal child benefit like the one proposed in The End Child Poverty Act. Under this legislation in 2023, the Social Security Administration would send all American families $428 per child every month. The End Child Poverty Act would consolidate the Earned Income Tax Credit and Child Tax Credit into a simple program, and with no income tests or phase-outs, every income quintile would benefit nearly equally. Adopting the End Child Poverty Act would also cut child poverty and deep child poverty by 64% and 70%, respectively. A universal child benefit is therefore a more efficient and equitable solution in providing tax relief to working families than uncapping the SALT deduction. If the members of the SALT caucus are genuinely attempting to improve the lives of working-class families, they should abandon their goal of repealing the SALT cap and advocate for a universal child benefit. 

This piece was edited by Deputy Editor Gio Liguori and Executive Editor Lancy Downs.

Photo by Pexels.