State and local tax deduction
The United States federal state and local tax (SALT) deduction is an itemized deduction that allows taxpayers to deduct certain taxes paid to state and local governments from their adjusted gross income. The Tax Cuts and Jobs Act of 2017 put a $10,000 cap on the SALT deduction for the years 2018–2026. The SALT deduction reduces the cost of state and local taxes to taxpayers. It disproportionately benefits wealthy and high-earning taxpayers in areas with high state and local taxes. The Tax Policy Center estimated in 2016 that fully eliminating the SALT deduction  would increase federal revenue by nearly $1.3 trillion over 10 years. Definition. For United States Federal Income Tax purposes, state and local taxes are defined in section 170(a) of the Internal Revenue Code as taxes paid to states and localities in the forms of: (i) real property taxes; (ii) personal property taxes; (iii) income, war profits, and excess profits taxes; and (iv) general sales taxes. The Tax Cuts and Jobs Act of 2017 capped the use of this itemized deduction at $10,000 ($5,000 for married persons who file separately). Effects. Tax savings from the SALT deduction flow  disproportionately to those with high incomes. According to the Joint Committee on Taxation, in 2014 88% of the benefit of the SALT deduction accrued to those with incomes above $100,000 and only 1% accrued to those making less than $50,000. The SALT deduction primarily benefits those in high-tax states, which tend to be those with consistent Democratic legislative majorities. In 2016, the ten counties with the largest SALT deductions per filer (on average) were in New York, California, Connecticut and New Jersey. These ten counties are in the New York metropolitan area and San Francisco Bay Area , which have high concentrations of wealth and expensive real estate. Since the deduction was capped at $10,000 in 2017, many homeowners have been unable to deduct thousands of dollars that they previously could, beyond what they pay in property taxes, to state, county and local governments in these places. In 2017, only taxpayers in New York, Massachusetts, Connecticut, and New Jersey (the states with the first, second, third, and ninth highest GDP per capita) on average sent more than $1,000 each to the federal government above what the state received per capita. Capping the SALT deduction tends to  increase this balance of payments deficit. History. Precursor. A deduction on state and local taxes predates the establishment of the permanent federal income tax instituted by the Revenue Act of 1913. To help fund the Civil War effort, President Abraham Lincoln signed the Revenue Act of 1862, which established a temporary income tax. The Revenue Act included a deduction for state and local taxes, as well as national taxes. This Civil War-era income tax was repealed in 1871. A federal income tax was again introduced in 1894, and again included deductions for state and local taxes, but in 1895  the Supreme Court ruled the income tax unconstitutional in "Pollock v. Farmers' Loan & Trust Co." Creation: Revenue Act of 1913. The first permanent income tax was established by the Revenue Act of 1913, after the ratification of the Sixteenth Amendment to the United States Constitution earlier that year. A deduction for state and local taxes, as well as for national taxes, was included in the Revenue Act. The federal income tax has included a deduction for state and local taxes ever since. Various changes. During the Great Depression, states expanded the number of taxes they levied to make up for  revenue shortfalls. This included an expansion in state income taxes (before 1930, only 14 states and Hawaii had state income taxes, which were imposed primarily on very high incomes at low rates) and state sales taxes (by 1940, sales taxes made up about 60% of state budgets). In response to the growing use of state sales taxes, in 1942 Congress made an explicit allowance for a deduction of state and local retail sales taxes. The introduction of the standard deduction in 1944 limited the scope of the state and local tax deduction, as well as all other itemized deductions (taxpayers  who choose to use the standard deduction may not use itemized deductions). On a number of occasions, Congress has restricted the types of state and local taxes that can be used with the SALT deduction. The Revenue Act of 1964 restricted the SALT deduction to state and local taxes on real property, personal property, income, general sales, and gasoline and other motor fuels. Amid the 1970s energy crisis, Congress passed the Revenue Act of 1978, which eliminated the deduction for state and local taxes on gasoline and motor vehicle fuel. The Tax Reform Act of 1986 disallowed sales taxes from  being deducted, while the American Jobs Creation Act of 2004 gave taxpayers the option of deducting either state and local income taxes "or" state and local sales taxes. Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017, signed into law by President Donald Trump, capped the total SALT deduction at $10,000 for the tax years 2018 through 2025. The increase in the standard deduction by the bill was also expected to reduce the number of taxpayers who claim the SALT deduction. In January 2018, the states of New York, New Jersey and Connecticut  (whose wealthy residents benefit disproportionately from the SALT deduction) sued the federal government over the constitutionality of the SALT cap, arguing that it unfairly restricts their ability to pursue their own preferred tax policies. In October 2019, a federal court dismissed the suit, was then rejected on appeal, and declined by the Supreme Court. Build Back Better Act. In July 2021, House Representative Tom Suozzi and Senate majority leader Chuck Schumer, both Democrats from New York, pushed legislation in the U.S. House of Representatives to repeal the deduction limit. In April 2021, as the Build Back Better Act was being  debated in the House, a bipartisan group of House lawmakers formed the "SALT caucus" to advocate for the repeal of the $10,000 limit on the state and local tax deduction. They later threatened to block the bill if a raise on the SALT deduction was not included. The version of the Build Back Better Act the House passed on November 19, 2021 would increase the SALT deduction cap to $80,000 until 2030, after which it would expire. Jared Golden was the only Democrat to vote against the act, because of his opposition to benefiting high-income taxpayers by  raising the cap. The Tax Policy Center concluded that more than 96% of the tax cut from raising the deduction cap to $80,000 would go to the highest-income 20% of households. Criticism. Critics of the deduction contend that it unfairly results in low-tax states and cities subsidizing high-tax states and cities.