Increasing the $10,000 cap on the state and local tax deduction could benefit millions of tax filers. But a proposal to do just that has become a point of contention and a possible roadblock to House Republicans’ passing “one big, beautiful bill” that reflects President Donald Trump’s agenda. That agenda includes making permanent essentially all of the individual income tax provisions from the 2017 Tax Cuts and Jobs Act, which are otherwise scheduled to expire this year. The SALT deduction, as it is known, enables federal income tax filers to deduct either their state and local income taxes or their state and local general sales taxes. In addition, they are also allowed to deduct their property taxes, assuming their income or sales taxes don’t put them over the cap. The tax break, however, may only be taken by those who itemize deductions on their federal returns, which only a minority of filers do. Prior to 2017, there was no limit on the SALT deduction. But the TCJA imposed a $10,000 cap — which, when coupled with the expanded standard deduction under that tax law, meant the number of people who claimed the SALT deduction fell dramatically — from about one-quarter of filers in 2017, according to the Urban-Brookings Tax Policy Center, to less than 10% today. Going forward, it appears there will still be a cap, but it likely will be higher than $10,000. The question is just how much higher and for whom? The House Ways and Means and House Budget committees already approved a tax package that would permanently raise the cap to $30,000 for any taxpayer whose modified adjusted gross income is $400,000 or less if married filing jointly (and $200,000 or less for single filers). But anyone above those income thresholds would still be able to deduct at least $10,000, according to the Tax Foundation. The expectation, however, is that the cap will have to be higher than $30,000 to garner needed votes by a small group of House Republicans. What’s the fight over? Republicans introduced the cap as part of their 2017 tax cuts bill to help pay for the sweeping legislation. And they are hoping to use it again as a revenue raiser in this year’s package. For example, the $30,000 cap proposal, which is expected to be amended before the House bill goes to the floor for a vote as early as Thursday, is estimated to raise $915.6 billion over 10 years relative to simply letting the cap expire as it is otherwise set to do if lawmakers don’t act, according to estimates from the Joint Committee on Taxation. But GOP lawmakers from high-tax blue states, such as California and New York, are demanding greater relief for their constituents, who are disproportionately affected by the lower cap. This has sparked intraparty battles with their colleagues from lower-tax red states, whose residents don’t benefit from the deduction nearly as much. It’s hardly the first time SALT has been the subject of dispute in modern times, said tax historian Joe Thorndike. The SALT break has been on the books since 1913, when the federal income tax code was created. It also had a decade-long stint during the Civil War as well. But there have been efforts to limit the deduction over the past five decades. While originally the SALT deduction was created so that the federal government didn’t encroach upon states’ ability to collect revenue, SALT today is portrayed as a subsidy to high-tax states and as regressive in that it disproportionately benefits higher-income households, Thorndike noted. Who benefits the most In 2020, the SALT deduction was claimed on just 8.6% of all federal tax returns, according to the Tax Policy Center. But the incidence of people claiming it was most concentrated in 13 states and the District of Columbia. The deduction was claimed on more than 20% of returns from Maryland and Washington, DC; and on 10% to 20% of returns filed by residents of California, Colorado, Connecticut, Georgia, Hawaii, Massachusetts, New Jersey, New York, Oregon, Utah, Virginia and Washington State. And those who have received the biggest break — both before and after the cap was imposed — are high-income filers, especially those in high-tax states and cities. In 2017, before the cap went into effect, for example, roughly two-thirds of the benefit went to those with incomes of $200,000 or more, according to the center. The average SALT deduction was about $13,000, but it topped $30,000 in eight counties, mostly in California and New York. While the vast majority of middle- and upper-income households received tax relief from TCJA regardless of where they lived, they would have received even more, had the cap not been instituted, said Howard Gleckman, a senior fellow at the TPC. For example, the tax cut for those in the top 20% would have been $2,500 larger, on average, had their state and local tax deductions not been limited, according to the center. Their average individual income tax cut was only about $6,200, instead of $8,700. The cap had an even greater impact on taxpayers in the top 1%, whose average tax cut was $40,100, instead of $71,000. But those in the bottom 80% would not have seen much of a change in the size of their tax cut had the cap not been put in place.
Who benefits most from the state and local tax deduction and why raising the cap is contentious
TruthLens AI Suggested Headline:
"Debate over Raising SALT Deduction Cap Highlights Tax Policy Divisions Among House Republicans"
CNN
7.4
TruthLens AI Summary
The proposal to raise the $10,000 cap on the state and local tax (SALT) deduction has sparked significant debate among House Republicans, as it could benefit millions of tax filers. Currently, the SALT deduction allows federal income tax filers to deduct their state and local income taxes or general sales taxes, along with property taxes, but only for those who itemize deductions. Since the implementation of the Tax Cuts and Jobs Act (TCJA) in 2017, which imposed the $10,000 cap, the number of filers claiming the deduction has plummeted from about 25% to less than 10%. The House Ways and Means and Budget committees have proposed raising the cap to $30,000 for married couples earning $400,000 or less and $200,000 for single filers. However, this proposed increase has become contentious, particularly as some House Republicans from high-tax states like California and New York argue for a higher cap to provide relief for their constituents who are disproportionately affected by the current limit.
The SALT deduction has historically been a point of contention, originally established to prevent federal encroachment on state revenue collection. In recent decades, it has been criticized as a subsidy for high-tax states that disproportionately benefits wealthier households. In 2020, the deduction was claimed by just 8.6% of federal tax returns, with significant concentrations in high-income areas. For instance, over 20% of returns in Maryland and Washington, D.C. claimed the deduction, while states like California and New York saw 10% to 20% of returns benefiting from it. High-income filers, particularly those earning $200,000 or more, received the majority of the tax benefits both before and after the cap was imposed. The TCJA led to an average tax cut of $6,200 for those in the top 20%, which could have been larger without the cap. The ongoing debate reflects deeper tensions within the Republican Party regarding tax policy, as lawmakers from lower-tax states push back against changes that might increase the tax burden on their constituents while providing greater relief to higher-income households in states with elevated tax rates.
TruthLens AI Analysis
The article explores the contentious debate surrounding the state and local tax (SALT) deduction, particularly focusing on the proposal to raise the existing $10,000 cap. This change could potentially benefit millions of taxpayers, yet it has become a significant issue for House Republicans and their broader tax reform agenda. The SALT deduction allows taxpayers to deduct certain state and local taxes from their federal income tax, but the 2017 Tax Cuts and Jobs Act (TCJA) imposed the current cap, which has reduced the number of filers utilizing this deduction.
Implications of the SALT Deduction Changes
Raising the SALT deduction cap is seen as a way to align the tax code more favorably for higher-income earners, particularly those in states with high local taxes. The expected increase in the cap to $30,000 for certain income brackets indicates a targeted approach to tax relief, which could be politically advantageous for Republicans seeking to gain support from constituents who would benefit from such changes. However, the proposal faces opposition and could complicate the passage of broader tax legislation.
Public Perception and Political Dynamics
The discussion around the SALT deduction is likely to generate mixed public sentiments. While some taxpayers, particularly in high-tax states, may welcome the proposed increase, others might perceive it as a benefit primarily for wealthier individuals. This dichotomy could influence how the Republican agenda is viewed by different voter demographics, potentially alienating constituents who do not see direct benefits from tax cuts that favor higher incomes.
Potential Distractions and Hidden Agendas
It seems that the focus on the SALT deduction could be a strategic move to divert attention from other pressing issues facing the administration and Congress. By framing tax policy changes as a major legislative priority, lawmakers may aim to rally support around a specific aspect of Trump’s tax agenda while obscuring other contentious topics or failures in policy implementation.
Manipulative Elements and Trustworthiness
The language used in the article seeks to highlight the benefits of raising the SALT cap while downplaying the implications for lower-income taxpayers. This selective framing may lead to a perception of manipulation, as the article does not fully address the potential downsides of such tax breaks. Thus, the article's reliability is somewhat compromised by its apparent bias towards portraying the cap increase positively without thorough analysis of broader consequences.
In summary, while the article discusses a significant tax policy issue that could affect a range of taxpayers, it also reflects the complexities of political maneuvering and public perception in the context of tax reform. The implications of the SALT deduction changes may have a substantial impact on political dynamics, particularly among different income groups and geographic regions.