Relaxing State and Local Tax Deduction Cap Would Make Tax Code Less Progressive



All three options would primarily benefit higher-earning tax filers, with repeal of the SALT cap increasing the after-tax income of the top 1 percent by about 2.8 percent; the bottom 80 percent would see minimal benefit.

Removing the marriage penalty and raising the SALT cap would also mostly benefit higher earners, though after-tax incomes of filers in the 95th to 99th income percentiles would rise the most. For example, raising the SALT cap to $15,000 single and $30,000 joint would result in a 0.8 percent increase in after-tax income for the 95th to 99th income percentiles and a 0.4 percent increase for the top 1 percent.

The top 1 percent benefits less because the SALT cap remains in place, so there is less of a benefit as a portion of their incomes when slightly increasing the cap. For example, a joint filer with $5 million in after-tax income could receive an additional $7,400 in reduced tax liability ($20,000 in increased SALT deductions times the 37 percent top individual income tax rate), which is a 0.1 percent increase in after-tax income.

Author(s): Garrett Watson

Publication Date: 3 May 2021

Publication Site: Tax Foundation