Individual Income Insights: Repeal of the State and Local Income Tax (SALT) Deduction

The potential elimination of federal deductions for state and local income, sales, and property taxes has been a major source of contention during the federal tax reform debate. The SALT deduction has an estimated revenue cost of $1.3 trillion of the next 10 years, making it one of the largest federal tax expenditures, according to a policy brief by the Urban-Brookings Tax Policy Center. As a result, eliminating the SALT deduction is one option being considered to help offset the cost of tax cuts. 

Supporters of the SALT deduction contend that eliminating it will hinder the ability of states to raise revenue and cover the costs of essential services and programs; opponents argue that the deduction disproportionately favors high-income earners and benefits high-tax jurisdictions such as California and New York.

The Tax Cuts and Jobs Act, released Nov. 2, 2017, makes significant changes to the SALT deduction. First, the bill limits the deduction to include only property taxes. Second, the amount of the deduction would be capped at $10,000. Currently, the deduction has no cap and taxpayers can deduct the greater of income or sales taxes, in addition to property taxes.

While the repeal of the income tax portion of this deduction will have a substantial affect at the federal level, it will also have an impact on states. Most states use federal adjusted gross income or taxable income as the starting point for calculating state income tax liability.

Most states, including California and New York, do not allow the deduction at the state level, meaning the amount of the deduction is added back when taxpayers calculate their state tax liability. However, a few states, including Maine, Nebraska, and Oregon, conform to the federal deduction and do not require an addback when calculating state income taxes.

Whether states would maintain the deduction following a repeal at the federal level is likely to be explored in the coming months as the Tax Cuts and Jobs Act is in committee for markup. House Ways and Means Committee Chairman Kevin Brady (R-Texas) introduced an amendment to the bill Nov. 6.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: How are states likely to respond to a repeal of the state and local income tax deduction?

To learn more about the Tax Cuts and Jobs Act, download Bloomberg Tax’s Roadmap to it’s Key Provisions, available here.

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