SALT Cap Bump to $40,000 in GOP Bill Would Help Few Taxpayers (1)

House Republicans’ deal to raise the limit on how much state and local tax payments people can deduct from their federal income taxes won’t have as broad of an effect as lawmakers who negotiated it hope.

Speaker Mike Johnson (R-La.) said that members from New York, New Jersey, and California—high-tax states most susceptible to the SALT limit—agreed to an increase in the House-passed bill from the current $10,000 cap to $40,000 for taxpayers earning $500,000 or less annually.

But that increase will only marginally broaden the pool of people who can take the deduction, policy analysts and practitioners said. That’s because the standard deduction was raised to $12,000 for individual filers and $24,000 for couples in the 2017 tax law that capped the previously unlimited SALT writeoff.

To even claim the SALT deduction, taxpayers must itemize their deductions in amounts greater than the standard deduction. Only 7% of taxpayers making under $200,000 itemized in 2022, compared to 38% of those earning more than $200,000, according to the most recent IRS data.

Quadrupling the cap would only exacerbate the gulf of who qualifies to claim the deduction, said Nikhita Airi, a research associate at the Tax Policy Center.

“Maybe a higher SALT cap tips the scales for some people, but I still think there are going to be relatively few itemizers that are able to take the SALT deduction,” she said. “It’s just such a narrow group of people who are relatively well-off and high-income—and I appreciate that their tax burden is challenging, but this is really a very narrow tax cut.”

It also permanently extends the 2017 tax law’s expansion of the standard deduction, an incentive for taxpayers to not itemize. And it shrinks the tax base—the opposite direction of broader conservative policymaking, said Alex Brill, a senior fellow at the American Enterprise Institute, which advocates for low taxes and fewer regulations on businesses.

“This is the key moment for this policy: If we start to unwind it, then it was really just a temporary experiment in having a meaningful SALT cap,” Brill said, in support of the lower limit.

Everyone should owe taxes, and those tax rates should be low, Brill said. Increasing the SALT cap lowers tax burdens, but only for a very small group of taxpayers.

“There’s some segments of the population that would really like to be able to have that deduction back,” he said. “And those people earn a few hundred thousand dollars a year, and they live in a handful of counties.”

Perks and Pass-throughs

A bigger SALT cap would join several other generous provisions in the tax bill as currently written, including lower overall tax rates and an expanded child tax credit, Brill said.

Those measures would benefit taxpayers who earn less than $500,000 and itemize their deductions, said Ariele Doolittle, a partner at tax-advisory firm Hodgson Russ. But the greater impact in the bill that affects taxpayers she advises are those who use a workaround developed by state lawmakers to bypass the SALT cap, known as pass-through entity taxes.

New York City and 36 states developed tax strategies that offered partnerships and S corporations to pay state and local taxes at the entity level, sidestepping the $10,000 SALT cap for individual members. Eliminating the pass-through entity tax workaround for professional services, as the House bill aims to do, would impact far more people than raising the SALT cap, Doolittle said.

“It would be nice if it was just that simple—the change from $10,000 to $40,000—but that’s not it,” she said.

The House bill passed 215-214 early Thursday morning, and now awaits the Senate to take up its version of President Donald Trump’s tax and spending agenda.

“The deal continues to have a SALT cap—and that’s nice,” Brill said. “It could be worse, but we’re heading in the wrong direction.”