Should cap on federal tax deductions for state and local taxes be lifted?

"Whenever there is a proposal for a tax cut, media pundits demand to know how you are going to pay for it. But when there are proposals for more spending on social programs, those same pundits are strangely silent."

– Thomas Sowell, Rose and Milton Friedman Senior Fellow on Public Policy, Hoover Institution, Stanford University.

What Thomas Sowell describes in his comment on tax cuts is the argument unfolding today in Washington, D.C., over negotiations on lifting the $10,000 cap on federal tax deductions for payment of state and local taxes (SALT).

Taxpayers can itemize their deductions to take advantage of reducing their federal tax liability through deducting up to $10,000 in certain state and local tax payments. But given the limit, itemization is less likely for most taxpayers because of the higher standard deductions that came into effect with the Tax Cuts and Jobs Act of 2017, which passed in President Donald Trump's first administration. The 2025 tax year standard deductions are $15,000 for single filers and married couples filing separately, and $30,000 for married couples filing jointly and surviving spouses. A head of household has a $22,500 standard deduction.

With deductions at these levels, the bulk of those itemizing are at the income scale’s upper end. A SALT cap repeal would particularly benefit high earners in high-tax states, such as California, New York, New Jersey and Connecticut. Blue states. And some Republican representatives of those states want to see changes that would benefit their constituents.

Therefore, there’s a political argument and counterargument to lift the cap. If high-income blue-staters benefit from a Trump initiative, they might be more sympathetic to Republican proposals. However, rank-and-file Republicans might see it as a big gift to hotbeds of political opposition, and the beneficiary states may not be moved toward GOP desires.

A factor in the policy argument is that the bulk of repeal benefits would flow to higher-income taxpayers and reduce revenue to the federal treasury. The counterargument is that the bulk of repeal benefits would indeed flow to higher-income taxpayers – who pay the highest amount in taxes – and that the economy and treasury will gain from people using their money to purchase goods and services. In the background is the ever-present question when tax cuts are discussed: from where will the money come to make up the difference in lost federal taxes, which is to say, how will it be paid for?

The Urban-Brookings Tax Policy Center, described as left-leaning by Influence Watch, issued its description of a SALT cap repeal, saying that

“President Trump’s proposal to repeal the $10,000 cap on the state and local tax (SALT) deduction would cut 2025 taxes by an average of more than $140,000 for the highest-income 0.1 percent of families but provide little or no help to low- and middle-income households, according to a new Tax Policy Center analysis. Those making $430,000 or more would enjoy nearly three-quarters of the benefit of Trump’s proposal.”

The Tax Foundation, described by Influence Watch as nonpartisan, while “members of its board and staff have affiliations with the Republican Party,” acknowledges the income issues – and then cites benefits of repealing SALT:

“Greater SALT cap relief could have a substantial fiscal cost and make the federal tax code more regressive by disproportionately benefiting higher earners, but it would boost incentives to work, save, and invest by reducing combined federal-state marginal income tax rates.”

Thomas Sowell’s point remains a poignant observation: people who don’t like tax cuts insist they must be “paid for,” but spending increases typically aren’t held to the same standard. For example, it’s difficult to find such concerns or demands about paying for the additional spending in the $1.9 trillion American Rescue Plan, signed into law in March 2021 by President Joe Biden.

A decision on SALT is coming, and the question is, how much SALT would you like with your taxes?

This originally appeared in KnoxNews.