By Matt Jensen and Donald J. Boyd

The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $10,000 cap on state and local tax deductions under the federal income tax. The SALT cap reduced the TCJA tax cuts significantly for many high-income taxpayers in high-tax states; for some taxpayers it led to tax increases.

There have been many proposals in Congress to repeal or alter the SALT cap. In a recent “Editor’s Pick” Special Report in Tax Notes States that followed an AEI and SUNY-Rockefeller College study, we assessed full cap repeal.

Now, reports suggest
that the Build Back Better package may include a provision to temporarily raise
the cap to $80,000 for most taxpayers, effective with the 2021 tax year and
ending with the 2030 tax year, rather than repealing the cap entirely.

In this two-part post, we compare the state-by-state impact of raising the SALT cap to $80,000, relative to current 2021 law and to full cap repeal. Part I reviews the national impact of raising the cap and compares it to the national impact of repealing the cap entirely. Part II reviews the state-by-state impact of raising the cap and compares it to the state impact of full cap repeal.

We model these impacts using the highly-regarded and open-source federal income tax model, Tax-Calculator. We apply this model to a custom microsimulation database we developed that is designed to represent taxpayers in each of the 50 states. Some taxpayers likely will change their behavior in response to a change in law, but we do not estimate these effects in this analysis.

National impacts of raising
the SALT cap to $80,000

Nationally, raising
the SALT cap to $80,000 would reduce federal income tax liability by $55.9
billion in 2021, or 4.4 percent. About 20 percent of this would go to taxpayers
with adjusted gross incomes of $1 million or more, and another 63 percent would
go to taxpayers with incomes between $200,000 and $1 million. (Table 1.)

The average change
in tax liability would be skewed toward upper incomes. The overall average tax
reduction (including taxpayers with no tax reduction) would be $656 per tax
return; taxpayers with incomes of $1 million or more would have an average tax
reduction of more than $17,000. Taxpayers in the $500,000 to $1 million income
group would have the largest tax cut as a percentage of disposable income (2.0
percent). (Table 2.)

How raising the SALT cap
compares to repealing it entirely

Relative to full cap repeal, raising the cap on the SALT deduction would reduce the revenue loss, make it less concentrated among the highest-income households, and spread the tax revenue reduction slightly more broadly across the states (see part II).

Table 3 shows the
first two of these impacts. Raising the SALT cap to $80,000 would reduce
federal income tax liability by $55.9 billion in 2021, making it $35.3 billion
less expensive than full cap repeal. Almost all of the difference ($33.9 billion)
would affect taxpayers with adjusted gross incomes of $1 million or more,
driving their share of the tax cut down from 49.2 percent to 19.7 percent. The
$17,411 average tax reduction for those with at least $1 million of income is
75 percent less than the $70,862 tax cut we estimate under full repeal (not
shown).

Proceed to part II of this post for estimates of the state-by-state impacts and a brief conclusion.

Matt Jensen is the director of the Open Source Policy Center at the American Enterprise Institute. Donald J. Boyd is the co-director of the State and Local Government Finance Project at the Rockefeller College of Public Affairs & Policy at the University at Albany and principal of Boyd Research LLC.

The post How raising the SALT cap would affect taxpayers in different states, part I appeared first on American Enterprise Institute – AEI.