Tax Refund

As House Republicans engage in a nasty internal battle over whether to raise the $10,000 cap on the state and local tax (SALT) deduction, a new Tax Policy Center analysis shows the Ways & Means Committee bill at the center of the squabble would reduce the share of households affected by the SALT deduction to only about 7.3 percent.

While the fight over SALT is intense in Washington, the deduction doesn’t matter to the vast majority of tax filers and it would matter to even fewer if the Ways & Means bill becomes law.

The Plan

The Tax Cuts for Working Families Act is part of a package of tax breaks primarily aimed at reducing corporate taxes. But one key provision would increase the standard deduction, which it would rename the guaranteed deduction, by $2,000 for single filers and $4,000 for couples filing jointly. The standard deduction this year is $13,850 for singles and $27,700 for joint filers.

For now, the increase would apply only to tax years 2024 and 2025 and be indexed for inflation in the second year. After 2025, all the individual income tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA), including the SALT cap, are due to expire.

The increase in the standard deduction would gradually phase out at higher incomes and be unavailable to singles making more than $240,000 or couples making more than $480,000.

Limited Benefit

But even with those limitations, the measure would reduce the share of households likely to itemize and claim the SALT deduction by more than one-fifth, from 9.3 percent to 7.3 percent.

To put it another way, if the House Republicans succeed in raising the standard deduction, 93 percent of tax filing households would claim it rather than itemizing. And they’d be unaffected by the SALT deduction, a pattern similar to what TPC found for the mortgage interest and charitable deductions.

The cap also is being watered down by a workaround that was greenlighted by the US Treasury and has been adopted by at least 36 states. It allows owners of pass-through businesses such as partnerships to pay state taxes through their businesses and thus avoid the cap, which applies only to individual tax returns.  

Separately, TPC estimated the SALT workaround would reduce projected 2024 federal revenues by about $20 billion annually, and most of the benefit would go to high-income business owners.

Who Would Benefit?

In its new analysis, TPC figures that in 2024, with the higher standard deduction, almost three-quarters of the total benefit of the SALT deduction would go to households in the top 20 percent of income, those making about $195,000 or more. With today’s standard deduction, that income group would receive roughly 70 percent of the benefit of the SALT deduction.

Households making between about $400,000 and $975,000 would receive about 27 percent of the benefit of the SALT deduction if Congress raises the standard deduction, compared to about 24 percent under current law.

The share of the benefits going to the top one percent (those making $975,000 or more) would rise from 11.6 percent to 14.1 percent with the higher standard deduction. The reason for these upward shifts:  Fewer middle-income households would itemize.  

A Hot Potato

The cap, which was added by the Trump Administration and congressional Republicans to the TCJA, has been a political hot potato almost since the day it passed. First, House Democrats representing districts in high tax states such as New York, New Jersey, and Connecticut pressured their party’s leaders to include some SALT cap relief in the various COVID-19 relief bills in 2021 and 2022.

But the high cost and the universal opposition of Hill Republicans killed those efforts. In part because they failed to win SALT changes, some House Democrats in those states were defeated by Republicans who promised to do what the Democrats could not, and get Congress to ease or eliminate the cap.

Now, the partisan politics has flipped. Those House Republicans are pressuring their leaders to soften the cap.  And Speaker Kevin McCarthy (R-CA) is in a bind. Most of his caucus opposes such a move, which conservatives say would raise federal subsidies for big spending blue states and add to the deficit.

But those newly-elected swing district Republicans may be the key to their party holding its slim House majority in 2024. And they  are demanding SALT relief in exchange for supporting the broader bill, which cannot pass the narrowly divided House without their votes.

So far these Blue State Republicans have succeeded in blocking a House vote on the Ways & Means bill. But, for all its controversy, the SALT deduction would benefit only a relative handful of mostly high-income households under current law, and even fewer if House Republicans succeed in increasing the standard deduction.  

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