Who Wins with the Repeal of the SALT Cap? It’s Not Who You Think

Former President Donald Trump’s plan to repeal the $10,000 cap on state and local tax (SALT) deductions would give an overwhelming advantage to the wealthiest households. According to a Tax Policy Center (TPC) analysis, households in the top 0.1%, making over $4.7 million, could see a tax cut of over $140,000, while low- and middle-income families would receive little to no relief.

What Is the SALT Cap?

The SALT cap was introduced as part of Trump’s 2017 Tax Cuts and Jobs Act, limiting the amount of state and local taxes that could be deducted from federal taxes. This cap will expire on January 1, 2026, if Congress doesn’t take action to extend it. But Trump’s new proposal is to repeal the cap altogether.

Impact on Low- and Middle-Income Households

For those in the bottom 40% of income, earning around $63,000 or less, the average tax cut would be non-existent. In fact, fewer than 1% of these households would see any benefit at all. Middle-income families, earning between $63,000 and $113,000, would see an average tax cut of just $30.

Verbatim line: "Low- and middle-income households would hardly benefit because their state and local tax bills are relatively low, and because the TCJA greatly increased the standard deduction."

The Real Winners: High-Income Households

Wealthier families, especially those earning $1 million or more annually, stand to gain the most from repealing the SALT cap. Many business owners already avoid the cap by deducting state and local taxes through their businesses, but a large portion of high earners remains subject to it. By repealing the cap, high-income earners in states like California and New York would receive a disproportionate share of the benefits.

Those in the top 1% would see their after-tax income rise by roughly 1.6%, with some receiving tax cuts of up to $35,000. This effectively creates a windfall for the highest earners, while offering no substantial help to the majority of taxpayers.

The Cost of Repeal

Repealing the SALT cap would be expensive. According to the Committee for a Responsible Federal Budget, removing the cap could add $1.2 trillion to the national debt over the next decade. Without making other tax law changes, the repeal would also exacerbate income inequality by benefiting only the wealthiest Americans.

Alternatives to Repealing the SALT Cap

While many lawmakers on both sides of the aisle have advocated for repealing the SALT cap, alternatives could be more progressive and less costly. One suggestion is replacing the SALT deduction with a fund that directly assists state and local governments during economic downturns. However, these more balanced ideas have not gained much traction, largely because “Repeal the cap” makes for a simpler campaign slogan.

Bottomline

The debate over the SALT cap repeal highlights a growing divide in the benefits it offers to different income groups. While high-income households stand to gain significantly, most middle- and lower-income families will see minimal to no change. If you’re considering moving to Orange County and want to navigate the complexities of the market and tax implications, let's connect to discuss your options.

Reference: Gleckman, H. (2024). A SALT Cap Repeal Would Overwhelmingly Benefit High-Income Households. Forbes.