Tax Foundation: SALT cap repeal would primarily benefit high-income earners
When the Tax Cuts and Jobs Act (TCJA), otherwise known as Trump tax cuts, was passed, one of the provisions in the bill limited the amount that taxpayers can use State and Local Taxes to reduce their federal tax burden –– State and Local Tax (SALT) deduction –– to $10,000.
With Biden considering major tax reform, one of the proposals on the table is the potential repeal or reform of the SALT cap. A lot of progressive researchers have, of course, argued that this could be regressive. The SALT deduction is overwhelmingly used by high-income individuals, which could make the tax code more regressive.
This is something that new research from the Tax Foundation agrees with. According to the Tax Foundation, repealing the SALT cap would not only cost the federal government money, but would also merely benefit high-income taxpayers.
While other proposals like (1) doubling the SALT cap for joint fillers in order to get rid of the marriage penalty, or (2) Increasing the SALT cap to $15,000 for individual fillers and $30,000 for joint filers would reduce revenue by fewer amounts, the benefit would still mainly accrue to high-income tax papers.
For example, completely repealing the SALT deduction would increase “the after-tax income of the top 1 percent by about 2.8 percent; the bottom 80 percent would see minimal benefit.” Raising the cap would do the same.
For example, raising the SALT cap to $15,000 single and $30,000 joint would result in a 0.8 percent increase in after-tax income for the 95th to 99th income percentiles and a 0.4 percent increase for the top 1 percent.
And when it comes to how these benefits are shared among income groups, high-income earners would receive the majority of the benefits every under option.
Making the SALT deduction more generous would provide most of the tax benefit to the top 20 percent of filers. About 98.5 percent of the benefit for repealing the SALT cap in 2025 would accrue to the top 20 percent of filers, and 62.5 percent of the benefit would accrue to the top 1 percent.
Retaining the SALT cap but increasing it to $20,000 for joint filers or to $15,000 for single filers/$30,000 for joint filers would provide more benefit to those in the 90th to 99th percentiles of income than completely repealing the SALT cap, but either adjustment still mostly benefits higher earners. The bottom 60 percent of earners receive about 0.3 percent of the tax benefit under either option.
Figure: Share benefits for income groups, by each option to relax the SALT cap
| Income Quintile | Repeal $10K SALT Cap | Make SALT Cap $10K Single/$20K Joint | Make SALT Cap $15K Single/$30K Joint |
|---|---|---|---|
| 0% to 20% | 0.0% | 0.0% | 0.0% |
| 20% to 40% | 0.0% | 0.0% | Less than 0.05% |
| 40% to 60% | 0.1% | 0.3% | 0.3% |
| 60% to 80% | 1.3% | 4.5% | 3.4% |
| 80% to 100% | 98.5% | 95.2% | 96.3% |
| 80% to 90% | 4.1% | 14.2% | 10.9% |
| 90% to 95% | 7.2% | 21.9% | 18.3% |
| 95% to 99% | 24.7% | 40.1% | 43.6% |
| 99% to 100% | 62.5% | 19.0% | 23.6% |
| TOTAL | 100.0% | 100.0% | 100.0% |
Considering just how vocal liberals are about helping lower-income individuals and increasing taxes on the rich, it is quite hypocritical just how focused they have been on repealing the cap when it would only benefit high-income earners.
Indeed, the tax code is hugely progressive, with high-income earners paying the most into the federal system. But there are better ways to reform the system that could benefit individuals all across the board, like lowering tax rates and eliminating unnecessary provisions, which merely make the tax code complex without increasing tax revenues.