Former President Donald Trump recently reaffirmed his proposal to repeal the $10,000 cap on the state and local tax (SALT) deduction during a rally in Vandalia, Ohio. According to an analysis by the Tax Policy Center (TPC), this repeal would disproportionately benefit high-income households, particularly those in the top 0.1% of earners, who would see an average tax cut of over $140,000 in 2025. In stark contrast, low- and middle-income families would receive little to no tax relief, with more than 90% of the lowest-income households expected to gain nothing from the repeal. Trump’s plan represents a significant shift from the original 2017 Tax Cuts and Jobs Act, in which many Republican lawmakers favored even eliminating the SALT deduction altogether.
The TPC’s findings indicate that only a small fraction of low- and middle-income households would benefit from eliminating the SALT cap. Specifically, approximately 5% of middle-income families (earning between $63,000 and $113,000 annually) would receive an average tax cut of just $30. The minimal benefits for these income groups occur because their state and local tax liabilities are generally lower, compounded by the fact that the Tax Cuts and Jobs Act substantially increased the standard deduction. As a result, the majority of taxpayers, over 90%, choose to claim the standard deduction rather than itemize their deductions.
In contrast, high-income households stand to gain significantly from the proposed repeal. The analysis highlights that many high-income earners, particularly business owners, have already structured their tax obligations to circumvent the SALT cap by paying state and local taxes through their firms. However, those high earners still affected by the cap would see their after-tax incomes rise substantially, particularly those in the top 1% who could gain an average of approximately $35,000, accounting for nearly 43% of the total benefits from the repeal. For the top 0.1% of earners, making around $4.7 million or more, the average tax cut would be about $141,000, fostering further tax disparity.
Moreover, individuals residing in high-tax states like New York, Connecticut, and California would experience the largest financial gains from the repeal, further accentuating regional inequalities. Trump’s plan does not propose reintroducing the pre-TCJA Alternative Minimum Tax, which historically limited the benefits derived from the SALT deduction, leading to the potential for even greater windfalls for affluent taxpayers in high-tax jurisdictions. This aspect raises questions about the overall fairness and sustainability of Trump’s tax proposals, particularly regarding their impact on low- and middle-income households.
Efforts to repeal the SALT cap have garnered traction from lawmakers across the political spectrum since its inception. However, simply removing the cap is economically infeasible and would predominantly serve as a regressive benefit for the wealthiest citizens, thereby exacerbating income inequality. The Committee for a Responsible Federal Budget estimates that lifting the cap could add around $1.2 trillion in costs over the next decade. This situation has instigated discussions about more equitable tax reforms, with TPC previously proposing alternative strategies for adjusting the SALT cap that would result in a more progressive and less costly approach.
Despite various suggested alternatives, including the establishment of a fund to provide direct assistance to state and local governments during economic downturns, the momentum for reforming the SALT cap remains stagnant. The simplicity and appeal of the slogan “Repeal the cap” understandably resonate more in the political arena, overshadowing more nuanced proposals that could address the underlying issues related to tax fairness and local government funding. As discussions continue, it poses a challenge to lawmakers to reconcile the demand for tax relief with the need for a fair and equitable tax system that does not disproportionately favor the wealthy.