How raising the SALT cap would affect taxpayers in different states, part II

Donald J. Boyd

Donald J. Boyd

Co-director of the State and Local Government Finance Project, Rockefeller College of Public Affairs

By Matt Jensen and Donald J. Boyd

In this second half of our two-part post reviewing the impact of raising the SALT cap to $80,000 in 2021, we focus on the state-by-state impacts. For an introduction and review of the national impacts, see part I.

State-by-state impacts of raising the SALT cap to $80,000

Taxpayers in California would receive $12.5 billion of the $55.9 billion national tax reduction, or 22.3 percent. They would be followed by New York ($6.9 billion), New Jersey ($3.7 billion), and Illinois ($2.7 billion). (Figure 1.) Taxpayers in these four states, combined, would receive 46 percent of the national tax reduction.

Source: Authors’ calculations.

Average tax reductions for returns with positive liabilities range from $1,338 in Connecticut to $61 in Alaska. The largest reductions would be in the higher-tax states: In addition to Connecticut, taxpayers in California, Massachusetts, New Jersey, and New York would receive tax cuts averaging more than $1,000 per return. (Figure 2.)

Source: Authors’ calculations.

How raising the SALT cap compares to repealing it entirely

Relative to full cap repeal, raising the cap on the SALT deduction would spread the tax revenue reduction slightly more broadly across the states (reviewed here) as well as reduce the revenue loss and make it less concentrated among the highest-income households (see part I).

Table 1 shows how the distribution of the tax cut differs between full cap repeal and an $80,000 cap, for the 10 states with the largest reduction under the $80,000 cap and for other states as a group. California and New York both have substantially smaller shares of the tax cut under the $80,000 cap than under repeal. Other states in the top 10, and remaining states as a group, all would have larger shares of the tax cut under the $80,000 SALT cap than full cap repeal. The SALT-cap proposal provides a $35.3 billion smaller tax cut than does full cap repeal, and the top 10 states would account for $27 billion of the reduction in tax benefits.

Source: Authors’ calculations.

Conclusions

Whether Congress will alter the SALT cap remains to be seen. Taxpayers in high tax states including California and several states in the Northeast were most affected by the cap, particularly those in upper-income ranges, and they would benefit most from full cap repeal. If Congress raises the cap to $80,000, as currently is being discussed, high-income taxpayers in high-tax states would benefit the most, but relatively less than they would benefit from full cap repeal.

Matt Jensen is the director of the Open Source Policy Center at the American Enterprise Institute. Donald J. Boyd is the co-director of the State and Local Government Finance Project at the Rockefeller College of Public Affairs & Policy at the University at Albany and principal of Boyd Research, LLC.

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