Heritage Action opposes the State and Local Tax (SALT) deduction cap increase (H.R. 7160) and will include it as a key vote on our legislative scorecard.
The State and Local Tax (SALT) deduction should be repealed altogether. Because the cost of federal tax deductions is spread among all U.S. taxpayers in the form of higher federal tax rates, the SALT deduction forces taxpayers in low-tax, low-debt states to subsidize excessive government spending in high-tax, high-debt states. The Tax Cuts and Jobs Act (TCJA) SALT cap was a step in the right direction.
Expanding the deduction would be a handout to high-income earners in high-tax states, encouraging liberal legislators in those blue states to raise taxes and spend more, knowing that a portion of their tax increase will be subsidized by taxpayers in other states. The Heritage Foundation’s Center for Data Analysis estimates H.R. 7160 will cost $11.2 billion this year for Americans who earn less than the $500,000 adjusted gross income (AGI) cap.
The SALT deduction is available only to taxpayers who itemize their deductions. Because of various TCJA provisions eliminating carve outs and exemptions, paired with increasing the standard deduction, it is now more simple for Americans to file taxes. Close to 90 percent of taxpayers opt for the standard deduction and do not deduct their state and local income taxes, real estate taxes, and property taxes from their federal tax liability. Who are the roughly 10 percent of taxpayers who do? Mostly higher income earners, with high tax liabilities, in high-tax states.
Thus, nearly 90 percent of all taxpayers receive no benefit from the SALT deduction. Even fewer Americans will benefit from this expansion in H.R. 7160 because not all taxpayers that currently claim the deduction reach the cap. Roughly, only nine percent of all tax filers claimed any SALT deduction in tax year 2020—compared with more than 40 percent of taxpayers who earn between $200,000 and $500,000 AGI.
Because the SALT deduction disproportionately benefits the highest income earners with large mortgages and high tax liability, raising the cap would have a negligible impact on marriage rates. The goals of reducing marriage penalties are to strengthen marriage and marriage rates, shrink poverty, and greatly improve overall family well-being. If Congress wants to seriously address marriage penalties, they must address them in programs impacting the bottom 40 percent of the population. This is where marriage has collapsed. Pro-marriage reform can be accomplished without added cost by curtailing existing waste, fraud, and ineffective benefits in the welfare system. The large and most damaging marriage penalties are in welfare—not the non-refundable tax deduction for top earners.
Heritage Action opposes the State and Local Tax (SALT) deduction cap increase (H.R. 7160) and will include it as a key vote on our legislative scorecard.