:max_bytes(150000):strip_icc()/Trump-Schumer-37130c2e27614730982a2345b5d2d7dc.jpg "How State and Local Taxes (SALT) Could Spice Up The Election Season")
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Key Takeaways
- Limits on state and local tax (SALT) deductions on federal tax forms could become an issue in the election as they are set to expire in 2025.
- The SALT deductions are popular in high-tax states like California and New York and mostly benefit high-earners.
- Republican presidential candidate Donald Trump has indicated he would ease or eliminate the limits, while Democratic presidential candidate Kamala Harris has yet to clarify her position.
- One analysis shows removing the cap on SALT deductions could increase the federal budget deficit by about $1.2 trillion.
Treatment of state and local tax deductions on federal tax forms is fast becoming a hot topic during this presidential election cycle.
Calls for removing limits on state and local tax (SALT) deductions are gathering steam among politicians. Meanwhile, taxpayers—especially high-income earners—await more clarity.
What Is a SALT Deduction And What’s The Big Fuss About?
Under current rules, SALT deductions allow taxpayers to deduct up to $10,000 in paid local taxes from their income, reducing the total federal income tax that would be owed.
The $10,000 limit was established by the Tax Cuts and Jobs Act of 2017 and is set to expire in 2025. Before that legislation, there was no cap on the amount of SALT deductions taxpayers could take.
According to the Bipartisan Policy Center, the SALT deduction primarily benefits high-income earners, along with taxpayers in states with high local taxes. Those taxpayers are talking to their financial advisors about how the result of this election could affect their tax bills.
Trump, Schumer Want SALT Deduction Limits Gone
In a reversal, Republican presidential candidate Donald Trump indicated support for removing limits on SALT deductions put in place by his administration. At a recent rally in Long Island, N.Y., Trump pledged to restore the original uncapped SALT deductions, which he said would save “thousands of dollars for residents of New York, Pennsylvania, New Jersey and other high-cost states.”
While prominent Democrats like New York Senator Chuck Schumer support restoring the full SALT deductions, Democratic presidential candidate Kamala Harris hasn’t addressed the issue.
The Bipartisan Policy Center said some legislators from high-tax states like California, New Jersey, and New York would also likely support eliminating the SALT deduction limits.
Removing SALT Deduction Limits May Add $1 Trillion To Deficit
Eliminating the SALT deduction limits would come at a price.
The University of Pennsylvania’s Wharton School has estimated that axing limits on the deductions would cost the federal government up to about $1.2 trillion in tax revenue over 10 years, adding more pressure to the country’s fiscal deficit.
“It is unlikely that the policy would be passed in full, though there could be a less costly compromise, such as doubling the cap,” wrote Michael Pearce, deputy chief U.S. economist at Oxford Economics.