The SALT Tax: History, Debate & Financial Impact

Proper planning can help mitigate the cap and optimize overall tax efficiency

As a financial advisor, one of the more frequently misunderstood aspects of tax planning is the “SALT” deduction – short for State and Local Taxes. The SALT deduction allows taxpayers who itemize their federal income tax returns to deduct certain taxes paid to state and local governments. These include:

State and local income taxes, or alternatively, state and local sales taxes
Property taxes paid on real estate
In some cases, personal property taxes, such as those paid on vehicles

Historically, this deduction helped mitigate the burden of being taxed by multiple layers of government by allowing those in high-tax states to reduce their federal taxable income by the amount paid in state and local taxes.

A Brief History of the SALT Deduction

The SALT deduction has been a part of the U.S. tax code since the federal income tax was established in 1913. Its original intent was to protect taxpayers from double taxation and preserve the autonomy of states to levy taxes without overly burdening their residents.

For over a century, this deduction remained largely untouched. However, that changed with the Tax Cuts andSave Post Jobs Act (TCJA) of 2017, which significantly altered the federal tax landscape.

One of the most controversial provisions of this legislation was the $10,000 cap placed on the SALT deduction for individuals (or $5,000 for married taxpayers filing separately). This cap was effective starting in tax year 2018 and is scheduled to sunset after 2025 unless extended or modified by future legislation.

The Ongoing Debate

The SALT cap has been a hot-button political issue since its inception. The core of the debate revolves around fairness, federalism, and fiscal responsibility.

Arguments in Favor of the Cap:

Tax Equity: Critics argue that the SALT deduction disproportionately benefits wealthier taxpayers, who are more likely to itemize deductions and pay higher state taxes. By capping the deduction, the federal government ensures a more level playing field.
Revenue Generation: The cap contributes to higher federal revenues, helping to offset the cost of other tax cuts included in the TCJA.
Encouraging State Reform: Some believe the cap puts pressure on high-tax states to reconsider their tax policies, potentially leading to more efficient state-level spending.

Arguments Against the Cap:

Double Taxation: Opponents argue the cap effectively taxes income twice – once by the state and again by the federal government – undermining the longstanding principle of tax coordination between levels of government.
Disproportionate Impact on High-Tax States: Residents of states like New York, California, New Jersey, and Illinois feel the brunt of the cap, leading to claims that the cap punishes states that invest more heavily in public infrastructure and social services.
Distortion of Housing Markets: By limiting the deductibility of property taxes, the cap can reduce housing affordability and create downward pressure on home prices in high-tax jurisdictions.

Who Is Impacted by the SALT Cap?

The impact of the SALT cap is not uniform across all taxpayers:

Higher-Income Taxpayers in High-Tax States: These individuals are most affected. For example, a taxpayer in New York who pays $25,000 in state income and property taxes can now only deduct $10,000, effectively increasing their federal tax bill.
Itemizers vs. Standard Deduction Takers: Only taxpayers who itemize their deductions are impacted. Following the TCJA, many Americans switched to the higher standard deduction ($13,850 for single filers and $27,700 for married filing jointly in 2023), making the SALT cap irrelevant for them.
Real Estate Investors and Small Business Owners: In some cases, these individuals may be impacted indirectly through changes in local tax dynamics and home values.

Planning Considerations

Navigating the SALT cap:

Bunching Deductions: Consider prepaying property taxes or making large charitable donations in the same year to exceed the standard deduction threshold.
Review State Residency: Some high-income clients may consider relocating to states with lower or no income tax – such as Florida or Texas – especially in retirement.
Entity-Level Tax Workarounds: Several states have implemented elective pass-through entity (PTE) taxes, allowing business owners to deduct state taxes at the entity level, bypassing the SALT cap.

Looking Ahead

Congress continues to revisit the SALT cap with proposals ranging from full repeal to modified increases in the cap amount. However, the political divide remains strong, and the future of the deduction is uncertain – especially with the 2025 expiration of the TCJA provisions on the horizon.

For those significantly impacted, it’s essential to monitor legislative developments and coordinate tax strategy accordingly. Proper planning can help mitigate the effects of the cap and optimize overall tax efficiency.

Nothing contained herein shall constitute an offer to sell or solicitation of an offer to buy any security. Material in this publication is original or from published sources and is believed to be accurate. However, we do not guarantee the accuracy or timeliness of such information and assume no liability for any resulting damages. Readers are cautioned to consult their own tax and investment professionals with regard to their specific situations