SALT Deduction Should Cut Marriage Penalty and Add Income Limit

Policy reform for the state and local tax deduction cap has been stuck in a cycle of will-they won’t-they for the better part of five years. The cap is a contentious issue that doesn’t break along party lines. The discourse highlights a deep divide in the checkbook realities of tax policy.

The current cap includes a so-called marriage penalty—there’s no doubling of the deduction granted single filers, as is usually the case. The latest attempt for reform failed in the House in mid-February, with opposition by Democrats dooming a push by high-tax state Republicans to get the penalty lifted for joint filers.

Beyond political concerns, there is reason to be cautious—while raising the cap may offer tax relief, it may also exacerbate existing and persistent housing affordability issues.

The most prudent path forward is to eliminate the marriage penalty but introduce an income limit to the SALT deduction. A nuanced approach could alleviate the tax burden on many taxpayers while limiting demand-side housing market distortions.

Housing Markets

In limiting the amount taxpayers can deduct for state and local taxes, the SALT deduction cap has a profound effect on housing markets in high-tax states. These states are often the same locales where housing supply struggles to keep up with demand. Tax policy that influences housing choices would only make these issues worse.

The SALT cap directly influences the amount of tax relief homeowners can receive for state property and sales or income tax. A lower cap means that homeowners in high-tax states can deduct less of their property tax, for example, so their taxable income is effectively increased along with their tax liability.

This does more than simply demand that prospective home buyers factor in their higher tax liability in their budget—it directly impacts their debt-to-income ratio, a metric used by lenders to determine eligibility and the maximum loan amount for which a prospective buyer qualifies. As a result, prospective buyers may find themselves limited in the price range they can afford or pushed out of the market entirely.

The net effect is broader than affecting simply an individual homeowner or family, as it can shift the socioeconomic realities of entire communities and local economies.

But in opening more of the market to an individual prospective buyer, raising the cap and providing increased SALT relief also increases the demand for housing and thus drives up prices. Any reform must thus be tailored to thread the needle between providing relief and juicing demand.

Income Limit

The specific structure of the current SALT cap, including the marriage penalty, adds a layer of complexity. For married couples, the inability to double the deduction limit means higher effective taxes on joint incomes, undercuts savings provided through other policies, and could impact housing decisions.

Addressing the penalty while implementing an income phaseout is the most judicious approach—balancing fairness in ensuring that marital status doesn’t disadvantage taxpayers with limiting impact on the housing market.

One could argue that the marriage penalty is, in fact, a crude progressivity device. Married filers tend to have higher household incomes, and reducing the amount that filers with higher incomes can deduct has a redistributive effect. The net result is a leg up for single prospective home buyers.

There is, however, a much simpler policy to achieve the same results: elimination of the SALT cap marriage penalty for taxpayers below a certain income level. According to the Penn Wharton Budget Model, a doubling of the SALT cap for married filers making less than $500,000 would cost $22 billion over 10 years.A $500,000 income cutoff would provide middle class taxpayers with relief but would also benefit a fair amount of upper income households—a risky proposition if we are to avoid market distortion.

Pew Research Center defines middle-income households as those with an income of 66% to 200% of the median household income. The median household income for the latest year data is available was $74,580 for 2022—which would put the middle-income range at $49,222 to $149,160.

A tailored adjustment to the SALT cap to eliminate the marriage penalty, with the caveat of an income cutoff at the upper level of the middle-income range, would provide relief to the middle class and simultaneously reduce the likelihood of unintended housing market consequences. The tax revenue cost also would be substantially less than the calculated $22 billion figure.

Political Realities

The debate over adjusting the SALT deduction cap is entwined within broader political dynamics and policy positions. In the most recent push, Democrats opposed the measure proposed by Republicans, even as many in the party have supported raising the cap in the past.

There is some indication Democrats may have seen a vote against the bill as more a vote against the bill’s author and sponsors. Assuming the question of who is advocating for the reform is of less import than the reform’s effects, lawmakers from high-tax states should be more inclined to support increasing or modifying the cap to provide relief for their constituents—regardless of affiliation.

The SALT realities are such that the identity of the states with the highest property taxes are, in fact, disproportionately coastal Democratic strongholds. The same can be said for all-in state and local tax burdens more generally. Any increase in the cap may be seen as a handout to blue states, but hardly something to be opposed by Democrats.

The path to reform is thus fraught with political complexities that derail consensus-building efforts. The SALT deduction cap is more than a discrete piece of tax policy. It is a lever that, when pulled, sends waves throughout the housing market.

Any successful effort to provide permanent SALT cap reform will require compromise. Eliminating the marriage penalty with a corresponding income limit presents just that. Advocates for SALT reform should nonetheless persist undeterred, expecting that a rare bipartisan consensus forged in economic and political interests can come about—Just maybe not in an election year.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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