State and Local Tax Deduction

As part of the 2017 Tax Cuts and Jobs Act (aka tax reform), Congress vigorously debated whether to limit or eliminate the ability for taxpayers to deduct state and local taxes (SALT). Ultimately, a $10,000 cap on the deduction was adopted in the 2017 bill. The SALT cap provision, along with several other individual provisions in the tax code are set to expire at the end of 2025. The 119th Congress stands at the cusp at another attempt to extend the 2017 TCJA. Early debate includes proposals to either eliminate or increase the cap on the deduction.

At its core, the SALT deduction reflects a partnership between the federal government and state and local governments. The deduction is fundamental to the way states and localities budget for and provide critical public services, and a cornerstone of the U.S. system of fiscal federalism. It reflects a collaborative relationship between levels of government that had existed for over 100 years. The SALT deduction was an accepted part of the tax structure that was critical to the stability of state and local government finance.

What is the SALT Deduction 

Taxpayers in the United States were granted a range of tax preferences from the federal government. The Revenue Act of 1913, which introduced the federal income tax, states that “all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits,” can be deducted. The Revenue Act of 1964 later named specific state and local taxes that could be deducted, which included: real and personal property, income, and general sales taxes. These tax preferences serve two important goals. First, by allowing taxpayers the ability to deduct state and local taxes (SALT), taxpayers avoid being taxed twice on the same income. Additionally, the deduction on property taxes, along with deduction on mortgage interest, provides a strong incentive for homeownership. The sales tax deduction provides similar incentives for encouraging spending — which facilitates economic growth.

Compared with other common deductions, the state and local tax deduction had a larger impact than the deductions for both charitable giving and mortgage interest. In recent years, 29.5% of tax units used the SALT deduction. Only 21% used the SALT deduction for mortgage interest, and 15% used the deduction for charitable donations.

How Do Taxpayers Benefit from the SALT Deduction?

Everyone in the United States benefited from SALT, but the SALT deduction was used directly by around 30% of all taxpayers. Taxpayers were given the option of deducting real estate taxes as well as either income taxes or sales taxes paid to state and local governments. While the SALT deduction was used across all income levels, the actual amount of property versus income versus sales tax deducted by lower, middle, and upper income taxpayers provides insight into how those taxpayers benefit. For example, while over 70% of SALT deductions for tax units with an AGI of more than $200,000 were from income taxes, over 60% of deductions from taxpayers with less than $50,000 in income came from property tax. This highlights how important the property tax deduction is for middle class homeownership.

In addition to its effect on taxpayers who itemize, regardless of adjusted gross income, the SALT deduction also benefited taxpayers in all 50 states. The tax deduction was used by Americans living in urban, suburban, and rural locations and across all congressional districts. The states with the highest percentage of taxpayers using the SALT deduction were in the East and Northeast regions. However, states in the West and Midwest also take advantage of the deduction. Overall, use of the SALT deduction was widespread among all states. The average deduction per tax unit in Connecticut, New York, and New Jersey were all over $7,000, and close to $6,000 in California.

National Association of Counties SALT Deduction County Profiles