Repealing SALT deduction cap would largely benefit wealthy: analysis

Repealing the GOP tax law’s $10,000 cap on the state and local tax (SALT) deduction would largely benefit wealthy taxpayers, estimates released Monday by the Urban-Brookings Tax Policy Center found.

The analysis comes as Democrats, as well as several GOP lawmakers in blue states, have expressed interest in doing away with the SALT deduction cap. They’ve argued that the cap hurts middle-class taxpayers in their districts.

The Tax Policy Center, whose director is a former Obama administration official, found that if the deduction cap is repealed retroactively to the start of this year, 56.5 percent of the tax cut would go to households in the top 1 percent of income in 2018. More than 96 percent of the benefit would go to taxpayers in the top fifth of income — those with income of more than $153,000.

In 2025, 48.2 percent of the tax cut produced by repealing the deduction cap, which is not indexed to inflation, would go to households in the top 1 percent. Almost 95 percent of the benefit would go to those in the top 20 percent of income, according to the Tax Policy Center.

Repealing the SALT deduction cap is a top tax priority for many Democratic lawmakers, particularly in high-tax states such as New York and New Jersey. During a House Ways and Means Committee markup earlier this month, Rep. Bill Pascrell (D-N.J.) offered an amendment to restore the full SALT deduction, offset by an increase in the corporate tax rate.

But the amendment was rejected, with Republicans arguing that it would largely help the wealthy. 

Howard Gleckman, a senior fellow at the Tax Policy Center, wrote in a blog post that Republicans’ arguments against restoring the full SALT deduction are “largely supported by TPC’s analysis.”

But Gleckman also said that high-income taxpayers in high-tax states tend to benefit less from the 2017 tax law than high-income taxpayers in low-tax states do.

Additionally, Gleckman pointed out that the Tax Policy Center’s analysis only looked at the direct effects of repealing the deduction cap. 

“With the SALT deduction cap in place, will those high-income households be more likely to oppose taxes needed to fund state programs that largely benefit low- and middle-income households? If they do, repealing the SALT cap may indirectly benefit low- and moderate-income households more than the TPC study shows,” he wrote. “Telling that story is much more complicated for blue states, but it may be a more appropriate argument.”

Pascrell maintained that middle-class households in New Jersey are hurt by the SALT deduction cap. His office, citing IRS data from 2016, said that more than 60 percent of New Jersey households who claimed the deduction had incomes between $50,000 and $200,000. His office also cited estimates from the Massachusetts Institute of Technology finding that a living wage in the state for a family of five that includes one working parent is about $67,000.

“Numbers don’t lie. The data we have is conclusive: the overwhelming majority of New Jerseyans who use state and local tax deductions are squarely in the middle-class,” Pascrell said. “These are people just trying to have enough money to keep up on mortgage payments, pay for the next family vacation, weather surprise medical costs, or afford college textbooks. SALT deductions have helped pay for all of these life necessities for years and years. And, importantly, this deduction allowed state and local governments to raise revenue for critical services without encroachment from the federal government.”