Don't rub SALT cap expansion in US tax system's wounds, urges CRFB

While extending the SALT deduction to include married couples would be a win for some taxpayers in high-income states, such a move would also come with severe economic consequences.

According to the Committee for a Responsible Federal Budget, increasing the state and local deduction cap for married couples from $10,000 to $20,000 – which is being floated as policymakers weigh options to extend expiring provisions of the 2017 Tax Cuts and Jobs Act – would be costly for the US economy and tax system.

"Extending the expiring individual and estate tax provisions under the TCJA would reduce revenue by $3.9 trillion over the next decade," the CRFB warned in a note Thursday. "[L]awmakers will need to include significant adjustments and/or offsets to prevent tax extensions from worsening an already unsustainable debt trajectory."

The committee said doubling the SALT cap for joint filers would put the US even deeper in the hole, increasing the revenue loss by $170 bllion to reach $4.1 trillion in the next 10 years. While restricting the cap increase to include only those earning less than $500,000, that would still mean an additional $110 billion in lost tax revenue.

"Some reports have even suggested policymakers are considering increasing the SALT cap to $100,000 for single filers and $200,000 for joint filers, which would reduce revenue by an additional $920 billion," it said, alluding to how a looser SALT cap could impact US debt.

While supporters of SALT cap expansion paint it as a form of middle-class tax relief, the CFRB said a looser SALT cap would almost exclusively benefit the highest-income households, particularly in high-tax states like New York, New Jersey, Connecticut, and California.

Legislators representing three of those named states were reportedly invited to meet President-elect Donald Trump at his Mar-a-Lago estate Saturday to discuss the possibility of expanding the SALT cap.

Citing figures from the Tax Policy Center, the note said that if the SALT cap deduction for married couples were doubled to $20,000, just 0.4% of the benefit would go to households making less than $100,000 annually. Meanwhile, almost 94 percent of the benefit would go to households that make more than $200,000 per year.

Another concern for the CFRB is the potential impact on tax complexity, which the TCJA effectively lessened when it was passed in 2017. By capping SALT deductions and increasing the standard deduction, the act reduced the number of households itemizing deductions from nearly 50 million to 15 million. Expanding the SALT cap could reverse that progress, the committee argued, prompting more taxpayers to itemize and raising the cost of tax compliance.

“Given the $3.9 trillion deficit impact of a straight extension of the TCJA, policymakers should prioritize reducing revenue losses rather than exacerbating them,” the CFRB said.