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Financial Planning > Tax Planning > Tax Deductions

Debate: Should Congress Raise the SALT Cap?

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Members of Congress have been debating the cap on the federal income tax deduction for state and local taxes (the SALT cap) since the Tax Cuts and Jobs Act of 2017 was signed into law. Now, two competing proposals are making their way through the House and Senate. 

Under the House version, the current $10,000 cap would be raised to $80,000, so that taxpayers could claim a federal tax deduction for up to $80,000 in state and local taxes (the cap would revert back to $10,000 in 2031 absent further action). 

Under the Senate version, the cap would remain at $10,000. A new exemption, however, would apply for taxpayers with income under a threshold (somewhere between $400,000 and $550,000). Both plans are designed to avoid adding to the federal deficit.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about which of the two SALT cap proposals they favored.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Each of these proposals is a step in the right direction if we’re focused on ensuring that middle-class taxpayers aren’t suffering because of the GOP-imposed SALT cap — but we can’t implement both.

I tend to favor the proposal to raise the cap from $10,000 to $80,000. Putting a firm cap on the actual state and local taxes that can be deducted considers both a taxpayer’s income (in terms of state income taxes paid) and assets (in terms of state real property taxes paid).

Byrnes: If we’re looking to minimize the impact on middle-class Americans, we should have a version of the SALT cap that draws the line based on income. The Senate approach, which would apply the SALT cap only to taxpayers earning above certain threshold amounts, is a much more targeted approach that avoids big giveaways to those we aren’t intending to benefit. 

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Bloink: Wealthy taxpayers can manipulate their income to ensure that they fall below any income thresholds that are proposed. Creating an income threshold would merely create another tax loophole to give the super-rich yet another option for avoiding their fair share of income tax liability.

I could support an income-based approach, but I don’t think it’s the best approach.

Byrnes: The income-based approach is more equitable because all taxpayers in similar tax brackets would be treated equally. Merely upping the cap to $80,000 creates a situation where two families in the same income tax bracket are subject to different tax treatment.

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Bloink: We’ve been debating the SALT cap since it became law back in 2017. We’ve had plenty of time to consider the issues. The most important thing is that we do something to limit the impact of the cap on middle-class Americans who were dealt a hidden tax increase merely because they live in high-tax states.

We also have to remember that we’re trying to fund a massive social spending process, so don’t want to provide the wealthy with additional ways to manipulate the tax system to pay less.

Byrnes: We use income thresholds in a variety of different places in the tax code — just look at the structure of our capital gains tax system. Basing the SALT cap on income thresholds is familiar and also ensures that only the wealthiest taxpayers have to worry about the cap.

If you make under $400,000 or $500,000, you just deduct all of your state and local taxes without the added complexity of the cap. Our tax code is complex enough. Let’s find a solution that addresses the problem while also favoring simplicity.

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