A Brief Update on SALT Deduction Cap Legislation

Tax

Just before leaving for their holiday recess, the House passed legislation that would suspend the $10,000 cap for state and local (SALT) tax deductions imposed by the Tax Cuts and Jobs Act in 2017. The legislation, the Restoring Tax Fairness for States and Localities Act (HR 5377) would increase the cap for married, joint-filers to $20,000 for their 2019 taxes and eliminate the deduction cap entirely for 2020 and 2021.

The SALT deduction allows taxpayers to deduct the amount of state and local taxes that they have paid from their federal taxes. This allowance supports state and local authority to impose the taxes necessary to provide public services, following the longstanding U.S. system of fiscal federalism. The existing cap opens taxpayers to being taxed twice on the same income: once by states and localities and then again by the federal government.

Since removal of the deduction cap would result in reduced federal tax revenue, the House bill includes an increase to the top marginal income tax rate from 37% to 39.6%. The legislation would also reduce the dollar amount at which the increased tax rate begins. According to a Tax Foundation analysis, removing the SALT cap would reduce federal tax revenue by about $177 billion, and increasing the top individual income tax rate to 39.6 percent and widening the top bracket would raise about $162 billion. This would result in a net tax cut over 10 years, reducing federal revenue by $18.8 billion.

While this legislation has passed the House, a corresponding bill has not yet been introduced in the Senate. The tax rate increases and anticipated loss of federal tax revenue of HR 5377 are likely to create challenges to passage in the upper chamber. Additionally, the current impeachment situation can be expected to be a further impede all upcoming Senate legislative action, including a potential SALT deduction bill.

NARC will continue to follow SALT deduction legislation and will work to support solutions like HR 5377 that support local government efforts to raise the funds they need to provide public services to their communities.

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