Key points:

  • House Democrats unveiled a $3 trillion stimulus package, dubbed the Heroes Act, which includes a provision to remove the SALT cap for 2 years.
  • 86 Percent of the total tax reduction from the state and local tax (SALT) cap lift goes to rich taxpayers making over $500,000; though they are just one percent of total taxpayers.
  • The biggest effect of SALT suspension would be to lower taxes on the rich in high tax states; the SALT suspension 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 suspension.

Economist Corner:

Earlier this week, House Democrats unveiled a new $3 trillion stimulus package, dubbed the Heroes Act, which includes a temporary suspension on SALT cap deductions for 2 years.

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.