Republicans putting together a sweeping tax and spending package are struggling to resolve an intraparty debate over the amount of state and local taxes taxpayers should be able to deduct from their federal tax liability.
The debate over the deduction, known as SALT, is pitting House Republicans from Democrat-majority states against fiscal conservatives.
Republicans must find a compromise to pass President Trump’s One Big Beautiful Bill Act.
The SALT deduction is claimed by the roughly 10% of taxpayers who itemize. The 90% who claim the standard deduction do not benefit from the deduction.
Taxpayers can currently deduct up to $10,000 of state and local taxes from their federal taxable income. Itemizers must choose between deducting state and local income taxes or sales taxes. They can also deduct property and real estate taxes.
The version of the bill that the House passed would raise the amount of deductible state and local taxes paid to $40,000, far more than most taxpayers pay, but the increase would benefit residents of high-tax states such as New York and California.
The savings under the higher cap would be based on the tax bracket and the amount of state and local taxes to deduct. Under the House proposal, a taxpayer in the 32% bracket earning $197,300 to $250,525 with at least $40,000 worth of SALT to deduct would save $12,800 on federal taxes. An example provided by the nonpartisan Tax Foundation showed a savings of $3,200 with the current SALT cap of $10,000.
The SALT deduction, created in 1913 when the federal income tax was established, is intended to prevent double taxation, but nonpartisan tax analysts say it disproportionately benefits the wealthy.
The House-passed bill included a shaky agreement brokered between Republican leaders and Republicans from New York, New Jersey and California, who threatened to vote against the measure without adequate SALT relief for their highly taxed constituents.
The measure quadrupled the $10,000 cap on the SALT deduction, which was enacted in 2017 as a revenue raiser to help offset Mr. Trump’s first-term tax cuts. For taxpayers earning more than $500,000 annually, the amount is phased down to the current law level, although the cap and income limit would increase by 1% each year to help guard against inflation.
The House bill does curtail the SALT deduction for taxpayers in the top income bracket and limits it for some pass-through businesses, but tax analysts say the benefits of lifting the $40,000 cap still go to the highest earners.
“The top 20 percent of taxpayers would be the only group to meaningfully benefit” from lifting the cap to $40,000, the Tax Foundation said. “The bottom 80 percent of earners would see no benefit.”
The Bipartisan Policy Center said increasing the cap to $40,000 primarily benefits “six-figure households in high-tax states, including New York, California, New Jersey and Connecticut.”
Low- and middle-income households would likely not benefit, given that most don’t have anywhere close to $40,000 in SALT liability, the Bipartisan Policy Center said.
Most House fiscal hawks reluctantly voted for the One Big Beautiful Bill Act despite the increase in the SALT cap, but Senate Republicans, none of whom represent the states that are most affected, want to lower the SALT cap before passing the package through their chamber.
“We believe as a matter of policy, you don’t want to have low-tax states subsidizing high-tax states,” Senate Majority Leader John Thune, South Dakota Republican, said on “Fox News Sunday.”
Mr. Thune said he is confident Republican lawmakers will find a “compromise position” on SALT that can pass both chambers.
On Monday, the Senate Finance Committee released text for the tax portion of the bill using the current $10,000 cap on SALT as a placeholder until a compromise position is reached.
The Joint Committee on Taxation scores the SALT changes in the House bill as a revenue raiser because, under current law, the $10,000 SALT cap is set to expire at the end of the year.
The committee projects that preventing a return to an unlimited SALT deduction and capping it at $40,000, along with the other limitations to the deduction in the House bill, would raise $787 billion over 10 years.
However, the Senate is planning to use an alternative scoring method known as a “current policy” baseline, which would assume any expiring tax provisions are extended. Thus, any increase in the SALT cap is a revenue loser under the Senate’s method.
Rep. Michael Lawler, New York Republican, warned in a statement Monday that if the Senate reduces the SALT cap, he would vote against the Trump bill and it “will fail in the House.” He said he “will not accept a penny less” than the previously negotiated $40,000 cap.
“I, along with my fellow SALT Caucus members, are actively engaging with Senators, House Leadership, and the White House and am confident the deal as previously negotiated will be in the final bill that is signed into law,” Mr. Lawler said.
Republican Reps. Nick LaLota and Andrew Garbarino of New York, Thomas Kean of New Jersey and Young Kim of California also demand that the cap remain at $40,000. Collectively, they could sink the bill in the House because Republican leaders can afford no more than three defections.
Mr. Lawler is fighting for the higher cap because he represents a suburban district north of New York City where taxpayers pay high state and local taxes.
Putnam County, one of the four counties he represents in New York’s 17th District, ranked second among all counties in 2020 for SALT deductions claimed per itemizing taxpayer, according to a Tax Foundation analysis of IRS data.
The average SALT deduction in Putnam County that year was $9,320, but itemizing taxpayers reported an average of $25,238 worth of SALT, meaning they could have deducted more had the $10,000 cap not been in place.
“Quadrupling the SALT cap will be a lifeline for the teachers, nurses, small-business owners and first responders who keep our communities strong, and for all of the working-class families and retirees on fixed incomes across the Hudson Valley,” Mr. Lawler wrote in a New York Post op-ed.
“For those who falsely claim lifting the SALT cap was only a tax cut for the rich, that’s a bunch of bull,” he said. “Over 93% of Hudson Valley home and business owners will see a tax cut if this bill is signed into law.”
