The deduction of state and local tax payments (known as SALT) from federal income taxes has been a subject of intense debate among economists, policymakers, and taxpayers over the past few years — with significant implications for the nation’s budget and fiscal outlook. While the policy has experienced frequent change recently, in all of its forms it has been both regressive for taxpayers and costly for the fiscal outlook.
The 2017 Tax Cuts and Jobs Act (TCJA) put a limit on SALT deductions, known as the SALT “cap.” Then, in 2025, that limit was increased from $10,000 to $40,000 as part of the One Big Beautiful Bill Act (OBBBA). Here, we examine the tax rules behind the SALT cap as well as their implications for tax fairness and fiscal policy at all levels of government.
What Is the SALT Deduction?
Each year, taxpayers filing federal returns can either claim the standard deduction or itemize their deductions. Those who choose to itemize can deduct state and local taxes from their taxable income.
The SALT deduction has existed since 1913, when the 16th Amendment made a federal income tax constitutional. Over the years, lawmakers changed which state and local taxes were deductible, narrowing allowable deductions over time. Currently, taxpayers can deduct either state and local income taxes or general sales taxes; in addition, they can deduct certain state and local property taxes.
In 2017, the TCJA placed a limit on the total amount that taxpayers can deduct for state and local taxes. That cap was set to $10,000 for both single taxpayers and those filing jointly starting in tax year 2018 and was due to expire at the end of 2025. Before the TCJA expired, the OBBBA once again modified the SALT deduction. The SALT cap was increased from $10,000 to $40,000 ($20,000 per person for married couples who file separately). In addition, the $40,000 is gradually phased down to $10,000 for taxpayers making over $600,000. In 2030, the SALT deduction will revert to a $10,000 cap unless Congress acts again.
The TCJA contributed to a decline in the share of taxpayers claiming the SALT deduction because of tax law changes such as creating a cap on SALT deductions and implementing a higher standard deduction. Prior to the TCJA, 30 percent of taxpayers claimed the SALT deduction; that number fell by about two-thirds after the TCJA was implemented, reaching 11 percent in 2018. Over that period, the average SALT deduction benefit fell by 80 percent. Looking ahead, it is likely that SALT deduction claims will increase once again because the maximum SALT deduction used to be less than the standard deduction while now the maximum SALT deduction is larger than the standard deduction.
Who Benefits from the SALT Deduction?
High-income taxpayers receive most of the benefits from the SALT deduction due to its regressive design. The SALT deduction allows those with the largest tax liability, who are often those with high incomes, to deduct larger amounts and receive greater tax breaks. In 2017, the last year before the cap was implemented, 71 percent of the benefit for the SALT deduction went to taxpayers with incomes over $200,000. Even under the $10,000 SALT cap, most of the SALT deduction benefits went to such taxpayers — 65 percent in 2024. Finally, under the $40,000 cap, high-income taxpayers are projected to receive a higher proportion of benefits compared to preceding years: 78 percent ($45 billion) in 2025.
In addition to those with higher incomes, taxpayers in jurisdictions with higher state and local tax rates have a greater opportunity to benefit from the deduction, not only because their state and local tax bills are higher, but also because they tend to have larger tax liabilities. For example, in 2022, Marin County, CA (near San Francisco) had the highest rate of SALT deductions at 29.0 percent of taxpayers. By contrast, Dickenson County, VA (in western Virginia) had the lowest, non-zero claim rate at 0.4 percent. That year, California had one of the highest top marginal income tax rates of 13.3 percent while Virginia’s top marginal income tax rate was 5.8 percent. Furthermore, Marin County had one of the highest per capita personal incomes of $168,508 while Dickenson County had a per capita personal income of $42,298. For the whole country that year, per capita income was $66,298.
Fiscal Implications of the SALT Deduction and Cap
The SALT deduction is costly for the federal government. In 2017, the year before the cap was implemented, federal government tax revenues were $69 billion lower due to the SALT deduction, making it the fifth-largest tax expenditure. In the years since the cap went into effect, SALT deductions have decreased. For example, SALT deductions dropped to $22 billion in 2024. However, with the new $40,000 cap, the Joint Committee on Taxation projects the deduction will grow three-fold, rising to $66 billion in 2029.
Federal rules for the SALT deduction also impact state and local tax policies. The SALT deduction lowers the after-tax cost of state and local taxes to taxpayers by offsetting a portion of those paid taxes with a reduced federal tax liability. By lowering the after-tax cost of state and local taxes, the SALT deduction can offset potential political and economic costs related to high tax rates imposed by states and localities. That makes it easier for states and localities to raise taxes and, in turn, allows them to spend more on public services. In fact, research suggests that the SALT deduction is associated with increased revenues for state and local governments, essentially subsidized by the federal government.
The SALT Cap Going Forward
The new SALT cap is currently set to expire at the end of 2030, at which point it will revert to a $10,000 limit for all incomes. Lawmakers will once again have the opportunity to consider reforms to this part of the tax code. They must balance priorities such as creating fairness in the tax system, assisting state and local governments, and improving federal fiscal health.
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