Personal Finance

Repeal of the cap on state and local tax deduction still in play. Here’s what to watch

Key Points
  • The Senate approved a $3.5 trillion budget resolution early Wednesday.
  • Voting along party lines, Democrats blocked an amendment from Sen. Chuck Grassley, R-Iowa, that would have stopped changes to the $10,000 limit on the deduction for state and local taxes.  
  • As negotiations continue, there are a few things to watch for this fall, policy experts say.
Sen. Chuck Grassley, R-Iowa, during Attorney General nominee Merrick Garland's confirmation hearing before the Senate Judiciary Committee on Feb. 22, 2021.
Demetrius Freeman | Pool | Reuters

The Senate approved a $3.5 trillion budget resolution early Wednesday after 14 hours of debate.

Voting along party lines, Democrats blocked an amendment from Sen. Chuck Grassley, R-Iowa, that would have stopped changes to the $10,000 limit on the deduction for state and local taxes, known as SALT.

The measure is part of Republicans' 2017 tax overhaul and has been a pain point for many Americans living in high-tax states. Those who itemize deductions can't write off more than $10,000 for property and state income taxes.

However, repealing the SALT tax cap has been controversial, with opponents saying removing the limit may primarily benefit the wealthy.

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"Democrats, on one hand, claim the wealthy are not paying their fair share, while at the same time proposing to give millionaires six-figure tax cuts," Grassley said during consideration of his amendment.

The top 20% of earners would receive more than 96% of the benefit of a SALT cap repeal, and the highest-income 1% would see 57% of the benefits, according to Tax Policy Center analysis. Moreover, the report shows only 9% of American households would be affected.

Still, the SALT cap repeal has been a priority for some lawmakers, threatening to derail President Joe Biden's economic agenda. Although the budget resolution framework mentions "SALT cap relief," the details are sparse. 

"It's something we've been following pretty closely over the past few months," said Garrett Watson, senior policy analyst at the Tax Foundation. 

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While the proposals are still unclear, the Tax Foundation has analyzed options, including boosting the $10,000 cap. An alternative may be tying the write-off to income level, he said. 

"The question is will that be acceptable to the folks in the House who are very much requesting this," Watson said. "And will that be acceptable to folks who are more skeptical, particularly some progressives."

The Tax Foundation estimates a full repeal of the SALT deduction limit may reduce federal revenue by $380 billion through 2025 when the provision will sunset.

Meanwhile, a growing number of states now offer SALT cap workarounds for pass-through businesses. These maneuvers allow certain businesses to bypass the deduction limit by using a state levy to cover part of the owner's state income taxes.