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State And Local Tax DeductionEdit

The State and Local Tax Deduction, commonly referred to as the SALT deduction, is a provision of the federal income tax code that lets taxpayers deduct taxes paid to state and local governments from their federal tax liability. Historically, this deduction reflects the recognition that income is taxed at multiple levels and that federal taxes should not fully double-count state and local taxes paid by residents. By tying some of the public costs of local and state governments to the federal tax system, SALT has been a fixture in debates over federalism, taxation, and how best to balance national revenue with local autonomy.

In practice, SALT covers the taxes most households actually pay to regionally governed authorities. The deduction typically encompasses property taxes and either state income taxes or state sales taxes. The policy interacts with the broader choice between itemizing deductions and taking the standard deduction, a distinction that has grown more consequential since the 2017 tax reform.

Overview

What SALT covers

  • Property taxes paid to local governments: Property tax.
  • State income taxes paid to state governments: Income tax.
  • State sales taxes paid to state governments: Sales tax.
  • The deduction is only available to taxpayers who itemize their deductions on their federal income tax return, i.e., those who do not take the standard deduction.

The 2017 cap and the standard deduction change

  • The Tax Cuts and Jobs Act of 2017 introduced a cap on the SALT deduction: the total deduction for state and local taxes is limited to $10,000 per year.
  • At the same time, the standard deduction was significantly increased, leading many filers to skip itemizing altogether. This reduced the number of households that can benefit from SALT, particularly in states with higher tax burdens.

Interactions with itemized deductions

  • Before the cap, many families with sizable state and local tax payments could itemize and gain meaningful federal incentive to accept higher taxes locally.
  • After the cap and the upgrade to the standard deduction, SALT matters mainly to filers who both reside in high-tax jurisdictions and have other deductible items that make itemizing worthwhile.
  • The choice between itemizing and taking the standard deduction remains a fundamental calculator for households when planning their taxes.

Policy debates and perspectives

Supporters’ arguments

  • Avoiding double taxation: SALT serves as a hedge against the federal tax system taxing income that has already borne state and local taxes.
  • Respect for local choices: Since states and municipalities decide how to raise revenue for roads, schools, and public safety, SALT recognizes the legitimate role of state and local governance.
  • Federalism and accountability: By tying tax relief to the taxes people actually pay locally, SALT preserves a link between public services and the voters funding them.
  • Predictability for homeowners and high-tax areas: For homeowners and residents in places with higher property or income taxes, SALT preserves a degree of predictability in federal tax treatment.

Critics’ arguments

  • Unequal benefits: The deduction tends to be worth more to higher-income households and to residents of high-tax states, making it a policy that can amplify geographic and income disparities in the federal tax code.
  • Distortions and incentives: Critics contend that SALT encourages higher state and local tax levels because taxpayers retain some federal benefit regardless of local policy choices.
  • Revenue and fairness concerns: Limiting SALT shifts some revenue discussions to the federal level and can influence decisions about national fiscal priorities.
  • Practical complexity: The interaction with the standard deduction and the cap can create confusion for filers who would otherwise benefit from a simpler tax structure.

Alternatives and reform proposals

  • Repeal or repeal-and-reform: Some prefer eliminating the SALT deduction altogether to simplify the tax code and curb federal subsidies to higher-tax jurisdictions.
  • Broaden or recalibrate: Proposals range from recalibrating the cap to shift the balance between federal simplicity and local autonomy, to replacing SALT with a more uniform deduction or credit that preserves neutrality without distorting state tax policy.
  • Trade-offs with state policy: Reform ideas commonly weigh the desire for a simpler federal code against the goal of allowing states to pursue policy choices without unlimited federal subsidy.

Economic and fiscal effects

Effects on state budgets and tax policy

  • SALT interacts with how states design their tax systems, particularly regarding property taxes, income taxes, and sales taxes. A strong SALT deduction can influence political incentives around state tax rates and the breadth of taxes that states employ.
  • The cap alters the fiscal dynamic by reducing the federal cushion available to residents in high-tax jurisdictions, potentially pressuring state budgets to adjust services or tax structures.
  • Critics and supporters alike point to the need for state policy reforms that promote growth, equity, and long-run sustainability, while balancing the federal budget and the costs of public services.

Effects on taxpayers

  • Homeowners in high-tax states often feel the most direct impact, especially those with sizable property taxes and state tax liabilities.
  • In states with lower taxes, the SALT deduction is less valuable, and the impact of the cap is correspondingly smaller.
  • For many taxpayers, the decision to itemize versus take the standard deduction remains the central planning question each filing season.

See also