By Girard Miller
Governing
(TNS)
July 22 — Now that the 2025 federal tax bill has been signed into law, it’s appropriate to revisit one of its most news-making elements: the federal deduction for state and local taxes (SALT). The new SALT rules quadrupled the maximum for those income offsets.
Time will tell whether those tax changes the president campaigned on will materially affect state and local revenues or their fiscal policymakers’ decision-making. But when it comes to SALT, statistical data from the Tax Policy Center on the cohort of affected taxpayers suggest that it won’t and possibly never did.
Historically, the SALT deduction was unlimited, going back to 1913 when the 16th Amendment authorized the federal income tax. The first meaningful limitation on the deduction was a general, partial phaseout for higher-income taxpayers in the bipartisan 1990 tax law. That eponymous “Pease limitation” applied to all itemized deductions but still allowed 20 percent of them at the upper income levels.
That concept prevailed until 2017, when Congress cut general tax rates and wiped out a chunk of the ever-unpopular alternative minimum tax (AMT), installing a $10,000 cap on the SALT deduction as part of their package of “pay-for” revenue offsets. The 2025 tax law has granted a five-year bump-up for the SALT cap to $40,000, after which it reverts to the current $10,000 limit unless there is some future legislation to change that.
The new higher cap will increase the federal deficit by about $320 billion over 10 years, according to the calculations of the conservative-leaning Tax Foundation. For perspective, that’s about the same number as the new law’s cutback in federal Supplemental Nutrition Assistance Program food assistance would save.
SALT has been a red vs. blue issue for years, with those who disfavor it asserting that it rewards residents and politicians in high-tax state and local jurisdictions and encourages tax-and-spend liberals to burden their upper-income constituents with ever-higher taxes because they will enjoy the federal tax offset as a subsidy. Lately, however, it has posed a particular political dilemma for GOP members in purple swing House districts in states typically controlled by the opposing party. This congressional subset became a voting bloc—the “SALT caucus”—that succeeded this year in securing the five-year increase.
The new SALT political math
In retrospect, the universal SALT deduction was advocated in an era when federal budget deficits and the IRS standard deduction were both smaller and intergovernmental bipartisanship was more the norm. The idea still has merit, but probably can be resurrected only if there comes a time when much higher marginal tax rates for those in the top brackets become fiscally unavoidable: A federal circuit breaker could someday be necessary to assure that even the ultra-rich pay no more than half their income in combined taxes at all levels, as a way to accomplish tax equity and deflect the issue of “confiscatory taxation.” For now, let’s focus on how this plays out back where the taxpayers live and vote on state and local fiscal issues.
Before one can analyze the local political consequences, it’s important to first understand which taxpayers will actually benefit from the recent SALT amendments. Precise statistics are still unavailable to those outside the Congressional Budget Office and the IRS, but public data sources show that only 9 percent of all taxpayers have lately claimed the 2017 version of the SALT deduction. Only half of those will benefit from the new law, and here’s why:
This slim number reflects the fact that most state and local taxpayers cannot itemize more than the standard deduction, which will now top out at $31,500. The latest available reported average itemized SALT deduction was $8,100, down from $13,400 in 2017 before the cap; that suggests that roughly half of the SALT itemizers don’t pay more than $10,000 in state and local taxes, so the new higher 2025 limit is meaningless for them. Add to that another 1.5 percent for the high-income filers who make so much that the new SALT deduction is phased out for them. Then add the chunk of those earning more than $400,000 whose SALT deductions may make them liable for the remaining alternative minimum tax, which could consume much of their new SALT largess. Thus, by simple arithmetic we may be only talking about 4 percent or so of the taxpaying population that could enjoy any material benefit from the higher SALT cap.
Here’s the math for this: To make the numbers work, Congress also set a limit on the new SALT deduction to phase it out for those making more than $500,000. To put this in perspective, the maximum financial benefit for those who can still now claim the new $40,000 SALT maximum will work out to about $10,000 in new bottom-line federal tax savings. Then, for those in the upper range of eligibility the alternative minimum tax system adds back all the SALT deductions, and applies a flat 28 percent rate on the taxable AMT income: that will likely reduce the SALT refund. At most, the tax savings will come out to roughly 2 percent of their gross income for those who will now be able to claim and keep this higher SALT deduction, and less for many. It’s definitely to some taxpayers.
State and local policy implications
More than three dozen states did enact “workarounds” after the 2017 SALT cap was set at $10,000, to permit pass-through business owners (S Corporations and LLCs) a roundabout way to deduct state taxes, and some tried unsuccessfully to provide a scheme to facilitate charitable donations to a special state fund in lieu of taxes, however the IRS prevented the latter. Neither of these measures affected state tax rates, bond proposals, or budgetary expenditures.
One observable behavioral impact purported to have resulted from the original SALT limits was a reduction in the number of New York state income tax filings that claim itemized deductions, but this is possibly a reflection of the coinciding higher federal standard deductions than the 2017 SALT cap. The states with higher income taxes continue to allow full deductions of local property taxes on their state returns.
A smarter political approach
Keep in mind that, absent future congressional action to the contrary, in 2030 the new higher SALT cap will revert to its former $10,000 level—or possibly be replaced by a different formula, perhaps something more akin to the old Pease limitation. Many state and local government associations and their lobbyists will feel compelled to defend the SALT deduction as an effort to thwart double taxation when this comes up again in five years.
Strategic planning is now needed: This may be an occasion when time-worn arguments will lead to failure if the SALT defenders go it alone on a fruitless path of repetition.
ABOUT THE AUTHOR:
Girard Miller is the finance columnist for Governing. He is a retired investment and public finance professional and the author of “Enlightened Public Finance” (2019). Miller brings 30 years of experience in public finance and investments as a former Governmental Accounting Standards Board member and ICMA Retirement Corp. president.
_______
© 2025 Governing. Visit www.governing.com. Distributed by Tribune Content Agency LLC.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
Tags: deductions, Legislation, SALT Cap, State and Local Taxes, Taxes
