Repealing the SALT Cap Helps the Rich in 5 States Plus DC, Hurts 42 States

Key points:

  • 86 Percent of the total tax reduction from the state and local tax (SALT) cap repeal goes to rich taxpayers making over $500,000; though they are just one percent of total taxpayers.
  • The biggest effect of SALT repeal would be to lower taxes on the rich in high tax states; the SALT repeal raises taxes on the rich in low tax states.
  • Just three states: California, New York, and Connecticut, plus Washington DC, would be big winners. That is, the state share of the national SALT deduction by the rich is more than 50 percent higher than the share of state taxes by the rich. Just two other states, Minnesota and New Jersey, would be winners and just three more states would see little effect.
  • Forty-two states would be losers as the tax increases on wealthy people in their states would exceed the tax savings from SALT repeal.

Economist Corner:

The sponsors of the Bill to remove the cap on the SALT deduction make their bill revenue-neutral by removing the cap for two years but raising the top tax rate for six. The tax reduction part of the bill would be roughly proportional to the share of the SALT deduction gotten by each state.  The offsetting tax increase would be roughly proportional to the share of income taxes paid by each state.  So, those states with higher shares of the SALT deduction than their share of taxes would be winners while those states with lower shares of the SALT deduction than their share of taxes would be losers.

The SALT deduction effectively subsidized high tax states by lowering the taxes paid in those states, leaving people in relatively low tax jurisdictions to pick up the difference. This was particularly true for taxes on high-income individuals who had high federal tax rates. A taxpayer in the 39.6 percent bracket got a rebate of 39.6 percent of their state and local taxes through a reduction in their federal taxes.

The effect of this was to encourage states to tax and spend more than they otherwise would and to have more steeply progressive state income tax schedules than they otherwise would. This analysis shows just how skewed the SALT deduction was to high-income taxpayers in just a very few states.