It’s early to try to suss out whether those tax changes dearest to the president’s heart will materially affect state and local revenues or their fiscal policymakers’ decision-making. But when it comes to SALT, statistical data on the cohort of affected taxpayers suggest that it won’t and probably never did.
Historically, the SALT deduction was unlimited, going back to 1913 when the 16th Amendment authorized the federal income tax. The first meaningful limitation on the deduction was a general, partial phaseout for higher-income taxpayers in the bipartisan 1990 tax law. That eponymous “Pease limitation” applied to all itemized deductions but still allowed 20 percent of them at the upper income levels.
That concept prevailed until 2017, when Congress cut general tax rates and wiped out a chunk of the ever-unpopular alternative minimum tax (AMT), installing a $10,000 cap on the SALT deduction as part of their package of “pay-for” revenue offsets. The 2025 tax law has granted a five-year bump-up for the SALT cap to $40,000, after which it reverts to the current $10,000 limit.
The new higher cap will increase the federal deficit by about $320 billion over 10 years, according to the calculations of the conservative-leaning Tax Foundation. For perspective, that’s about the same number as the new law’s cutback in federal Supplemental Nutrition Assistance Program food assistance would save, arguably an example of Robin Hood in reverse.
SALT has been a red vs. blue issue for years, with those who disfavor it asserting that it rewards residents and politicians in high-tax state and local jurisdictions and encourages tax-and-spend liberals to burden their upper-income constituents with ever-higher taxes because they will enjoy the federal tax offset as a subsidy. Lately, however, it has posed a particular political dilemma for GOP members in purple swing House districts in states typically controlled by the opposing party. This congressional subset became a voting bloc — the “SALT caucus” — that succeeded this year in securing the five-year increase.
The New SALT Political Math
In retrospect, the universal SALT deduction was advocated in an era when federal budget deficits and the IRS standard deduction were both smaller and intergovernmental bipartisanship was more the norm. The idea still has merit, but probably can be resurrected only if there comes a time when much higher marginal tax rates for those in the top brackets become fiscally unavoidable: A federal circuit breaker could someday be necessary to assure that even the ultra-rich pay no more than half their income in combined taxes at all levels, as a way to accomplish tax equity and deflect the issue of “confiscatory taxation.” For now, however, don’t hold your breath. Instead, let’s focus for now on how this plays out back where the taxpayers live and vote on state and local fiscal issues.
Before one can analyze the local political consequences, it’s important to first understand who’s left in the shrinking sliver of taxpayers who will actually benefit from the recent SALT amendments. Precise statistics are still unavailable to those outside the Congressional Budget Office and the IRS, but public data sources show that only 9 percent of all taxpayers have lately claimed the 2017 version of the SALT deduction. Only half of those will benefit from the new law, and here’s why:
This slim number reflects the fact that most state and local taxpayers cannot itemize more than the standard deduction, which will now top out at $31,500. The latest available reported average itemized SALT deduction was $8,100, down from $13,400 in 2017 before the cap; that suggests that roughly half of the SALT itemizers don’t pay more than $10,000 in state and local taxes, so the new higher 2025 limit is meaningless for them. Add to that another 1.5 percent for the high-income filers who make so much that the new SALT deduction is phased out for them. Then add the chunk of those earning more than $400,000 whose big, beautiful SALT deductions will throw them into the jaws of the remaining alternative minimum tax, which in turn will eat up much of their new SALT largess. Thus, by simple arithmetic we’re only talking about maybe 4 percent of the taxpaying population that will now enjoy any material benefit from the higher SALT cap.
Here’s the math for those lucky 4 percenters and the disappointed others: To make the numbers work, Congress also set a limit on the new SALT deduction to phase it out for those making more than $500,000. To put this in perspective, the maximum financial benefit for the affluent few who can still now claim the new $40,000 SALT maximum will work out to about $10,000 in new bottom-line federal tax savings. Then, for those in the upper range of eligibility the alternative minimum tax system adds back all the SALT deductions, and applies a flat 28 percent rate on the taxable AMT income: Whoosh, there goes their new SALT refund! At most, the tax savings will come out to roughly 2 percent of their gross income for the lucky few who will now be able to claim and keep this higher SALT deduction, and less for many.
It’s still a windfall to that lucky few, of course, but not locally actionable for the vast majority of recipients. Nobody is really likely to relocate to a new domicile simply as a result of SALT policy changes or prospects. They may or may not move from a high-tax to a low-tax jurisdiction, but that won’t be on account of the new SALT ceiling — especially for the 4 percenters in this income range. The “ultra-high net worth” taxpayers are the folks most likely to relocate to benefit from lower state income tax rates regardless of federal deduction formulas. The new five-year SALT tax break does not itself cover the frictional costs of relocating. This is about political posturing, not economics.
State and Local Policy Implications
The most relevant question now is whether that is going to affect these taxpayers’ voting behavior in any way that they wouldn’t already be inclined. It seems doubtful. What state politicians are now going to raise their tax rates because of the new SALT cap? Who’s going to vote for or against bond issues on the basis of a short-term federal tax break? We already have some empirical history here: No state has cut its progressive income tax rates since the SALT cap was imposed in 2017 to appease taxpayers who lost their federal deductions. The Tax Policy Center looked into whether the SALT cap had any impact on state tax rates and found none.
More than three dozen states did enact “workarounds” after the 2017 SALT cap was set at $10,000, to permit “pass-through” business owners a roundabout way to deduct taxes, and some tried unsuccessfully to provide a scheme to facilitate charitable donations to a special state fund in lieu of taxes. IRS put the kibosh on the latter. Neither of these measures affected state tax rates, bond proposals or budgetary expenditures.
The only observable behavioral impact purported to have resulted from the original SALT limits was a reduction in the number of New York state income tax filings that claim itemized deductions, but this is more likely to reflect the coinciding higher federal standard deductions than the 2017 SALT cap. The states with higher income taxes continue to allow full deductions of local property taxes on their state returns. In this regard, congressional rhetoric has been unmatched by the facts.
Even more doubtful is the idea that high-tax state and local elected officials will now take the new five-year federal SALT deduction ceiling into consideration when they vote on tax rates, bond issues or other fiscal matters. Taxpayers, voters and politicians will consider it irrelevant at this level. Although purple-district members of the House will likely tout their SALT success in the next midterm elections, their constituent local elected officials will remain unfazed in practice if not in rhetoric.
A Smarter Political Approach
Keep in mind that, absent future congressional action to the contrary, in 2030 the new higher SALT cap will revert to its former $10,000 level — or possibly be replaced by a different formula, perhaps something more akin to the old Pease limitation. Although the traditional SALT proponents will undoubtedly strive to extend the new higher cap or eliminate it altogether, the congressional leverage enjoyed by this year’s small bloc of holdout political wranglers seems unlikely to endure, unless the economy and resulting tax receipts can actually grow at the optimistic rates espoused by the tax-cutting majority now controlling Congress. That could happen, but history, demographics and macroeconomics suggest it won’t.
Although many state and local government associations and their lobbyists will feel compelled to valiantly defend the SALT deduction as hallowed ground when this comes up again in five years, a smarter political approach might be worth developing. For example, an alternative phaseout for all deductions could apply to those in the top 5 percent of household incomes (now over $290,000) or possibly even the 7 percenters with total incomes over roughly $240,000, if that’s necessary to make the math work in light of mounting debt and deficits. Such a formula would be worth supporting and would go a long way toward putting all taxpayers back on an equal and fair footing. The political problem, of course, is building a coalition around this idea.
Strategic planning is now needed: This may be an occasion when time-worn arguments will lead to failure if the SALT defenders go it alone on a fruitless path of repetition. No special interest should be sacred in the next — or any — round of tax legislation.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
