The US Congressional Research Service has released an updated report on the Federal Deductibility of State and Local Taxes on 16 October 2024.

Under current law, taxpayers who itemise can deduct state and local real estate taxes, personal property taxes, income taxes, and sales taxes (instead of income taxes) from federal income when calculating taxable income. The federal deduction for state and local taxes (the SALT deduction) shifts the burden for part of these state and local taxes to the federal government through lower tax collections.

The theory would suggest that taxpayers are willing to accept higher state and local tax collections under this system because their federal tax deduction mitigates the net effect of such increases. In addition, there is some evidence that state and local governments rely more on these deductible taxes than on nondeductible taxes and fees for services. SALT deduction benefits are disproportionately claimed by high-income taxpayers and taxpayers in areas with high state and local tax rates.

The 2017 tax revision (commonly referred to as the Tax Cuts and Jobs Act, TCJA; P.L. 115-97) made a number of changes to the SALT deduction. Most notably, the TCJA established a limit, or “SALT cap,” on the amounts claimed as SALT deductions for tax years 2018 through 2025. The SALT cap is USD 5,000 for married taxpayers filing separately and USD 10,000 for all other taxpayers.

The changes enacted in the TCJA have considerably affected SALT deduction activity since 2018 and will continue to do so through 2025, when most individual TCJA provisions are scheduled to expire. The increased value of the standard deduction, roughly doubling from its pre-TCJA value for tax years 2018 through 2025, along with the reduced availability of SALT and other itemised deductions, have both reduced the number of taxpayers claiming the SALT deduction and the average amount claimed per deduction.

The SALT deduction changes enacted through the TCJA are currently scheduled to expire after tax year 2025.

Recent Congresses and Administrations have considered a variety of changes to the SALT deduction in recent years, including making the SALT cap permanent, raising and extending the SALT cap, eliminating SALT deduction claims for sales taxes, and capping the effect of SALT deductions on tax liability. Limiting the SALT deduction could result in state and local public spending declines, as the SALT deduction effectively makes the federal government “pay for” a portion of state and local taxes.

The magnitude of any such decline would be uncertain. Limiting the SALT deduction would also shift some of the federal tax burden away from taxpayers in low-tax states and low-income taxpayers to taxpayers in high-tax states and high-income taxpayers. Expanding SALT deduction benefits would have the opposite effect, placing a greater burden on low-income taxpayers and taxpayers in low-tax states.