Inside Congress's Fight Over The $40,000 SALT Deduction Cap

The House of Representatives unveiled and passed the One Big Beautiful Bill Act, and now the bill is with the Senate. One of the key provisions from the House's version is a $40,000 cap on state and local income taxes (SALT) paid by individual taxpayers, which, as Forbes reported, was a last-minute alteration to secure the votes for passage in the House. While beneficial for many taxpayers, CNBC reports that the Senate Finance Committee has provided preliminary versions of some items in their version of the bill, including one that would keep the SALT deduction at $10,000. This article describes the SALT deduction, how the Tax Cuts and Jobs Act of 2017 introduced a cap to the deduction, and why this cap is so contentious during the passage of the One Big Beautiful Bill Act.
Section 164 of the Internal Revenue Code highlights the SALT deduction, which allows individual taxpayers to deduct taxes paid to state and local governments. These taxes often include property taxes and income taxes. This means that a taxpayer can lower their income dollar-for-dollar based on the amount of taxes they pay to their local jurisdictions. Importantly, this deduction only applies to the amount paid in state and local jurisdictions, meaning that one cannot deduct their federal income taxes paid. The deduction also allows taxpayers to deduct their state and local sales taxes (in lieu of income taxes). This provision benefits taxpayers in states that levy low income taxes.
This deduction is considered below the line, meaning it can only be taken by taxpayers who itemize their taxes. Taxpayers can deduct the standard deduction, which is $15,000 for single taxpayers and $30,000 for married taxpayers, or deduct their itemized deductions. While the federal government does not explicitly require taxpayers to choose what is most beneficial for themselves, the typical taxpayer will deduct whichever is higher, meaning taxpayers only itemize their deductions when they are more than the standard deduction. Thus, even though virtually all taxpayers pay some form of state and local income, property, or sales taxes, not nearly as many explicitly benefit from the deduction since the standard deduction is more financially beneficial.
Prior to the Tax Cuts and Jobs Act, taxpayers were allowed to deduct unlimited amounts for SALT. According to the Tax Foundation, this notion led to a substantial cost, upwards of $24.4 billion per year of tax deductions for taxpayers, reflecting lost revenue to the government.
The Tax Cuts and Jobs Act dwindled this benefit down to just $10,000 per taxpayer. Furthermore, the legislation significantly increased the standard deduction from $12,700 for married taxpayers in 2017 to $24,000 in 2018. The significant increase in the standard deduction, in conjunction with the cap on what can be deducted, significantly lowered the number of taxpayers choosing to itemize and, consequently, the number of taxpayers who can deduct their SALT paid.
The ability to deduct SALT has asymmetric effects on states depending on how much the state levies in taxes. According to the Bipartisan Policy Center, states like California, New York, New Jersey, and Connecticut impose significant taxes on their taxpayers, and they often claim SALT as an itemized deduction. Meanwhile, lower tax states like North Dakota, South Dakota, and West Virginia have a very small percentage of taxpayers claiming a deduction.
A key piece of the House's One Big Beautiful Bill Act was to increase the SALT deduction cap from $10,000 to $40,000, as I discussed in a Forbes contributor article. According to SmartAsset, this deduction would also increase annually by 1% through 2033. Thus, the $40,000 deduction would eventually rise to $43,313. However, the legislators also imposed a taxable income cap on the deduction of $500,000 (also increases by 1% annually). This means that as taxpayers make more than $500,000, the $40,000 SALT deduction cap decreases. Despite the deduction's phaseout, all taxpayers, regardless of income level, can deduct at least $10,000.
As suggested above, increasing the SALT deduction cap from $10,000 to $40,000 provides substantial benefits for taxpayers living in some jurisdictions over others. Notably, taxpayers living in high tax rate and high property value states tend to receive substantially more benefits for a higher cap than others because those taxpayers are more likely to be spending more than $10,000 in SALT. This notion has provided substantial fuel to the fire in Congress. The Hill reports that many representatives in these high tax states required a higher SALT cap deduction for the One Big Beautiful Bill Act to be narrowly approved by the House. Put differently, absent this increased deduction, it is unclear whether the bill would have been approved by the House of Representatives.
However, this provision is very expensive. As I noted in a Forbes contributor piece, the CBO estimates that the One Big Beautiful Bill Act will increase the deficit by $2.4 trillion over the next 10 years, and the CBO estimates that 25% of this increase ($600 billion) can be credited to a larger SALT deduction. FoxNews reports that weighing the costs and benefits has led to substantial infighting among Republicans, with New York House Republican Mark Lawler declaring the bill 'Dead on Arrival' if the SALT cap is not raised from $10,000. It also reports that the $10,000 figure from the Senate Finance Committee was just a placeholder as talks continue about what will be part of the Senate's version of the bill.
Despite some of the infighting among the Republican party about the size of the SALT deduction, this issue potentially reflects a rare moment where the disagreements are between states rather than between parties. Even if the One Big Beautiful Bill Act is passed as is, the higher SALT cap would substantially benefit the taxpayers of high-tax states like New York, which Senate Minority Leader Chuck Schumer represents, and California, which former Speaker of the House Nancy Pelosi represents. Interestingly, the House's provision also caps who can receive the full benefit, effectively restricting the increased deduction to those who are not among the highest earners.
Given the unique nature of this portion of the bill and the sheer magnitude of the price tag that comes with it, the SALT cap deduction remains one of the most intriguing aspects of the One Big Beautiful Bill Act as it finishes up at the Senate Finance Committee and heads to the Senate floor.

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