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This article is part of an ongoing series of pieces that focus on individual tax expenditures [ [link removed] ] that policymakers might consider eliminating or reforming to address America’s dire fiscal trajectory. Previous articles in this series have addressed the low-income housing tax credit [ [link removed] ] and tax-exempt interest on municipal bonds [ [link removed] ].
The state and local tax deduction, otherwise known as SALT, allows taxpayers to deduct state and local income taxes (or, alternatively, sales taxes) and property taxes from their federal income tax liabilities. This benefits Americans who live in states with high taxes but places a corresponding burden on federal taxpayers who must compensate for that lost revenue.
Following enactment of the 2017 Tax Cuts and Jobs Act (TCJA), the SALT deduction for taxes paid in any taxable year during 2018-2025 was limited to $10,000 per household ($5,000 for married individuals filing separately). This $10,000 cap was forecast to raise [ [link removed] ] an estimated $668 billion over the decade, helping to pay for a large chunk of other TCJA provisions, such as lower individual income tax rates and a doubling of the standard deduction. The cap mitigates some of the SALT deduction’s costs but will expire in 2026 unless Congress renews it. Without the cap, taxpayers will once again be able to deduct all their qualifying state and local taxes.
In terms of fiscal costs, the Treasury estimates [ [link removed] ] that under current law, the SALT deduction will cost more than $1.24 trillion in lost federal revenue over the coming decade (2024-2033). To put it another way, after the expiration of TCJA provisions, this deduction is forecast to cost [ [link removed] ] the Treasury $188 billion a year by 2027. Another estimate by the Tax Foundation [ [link removed] ], a nonpartisan tax policy research think tank, states the 10-year (2026-2035) budget cost of allowing the SALT cap to expire after 2025 will be roughly $2 trillion. This is one of the largest tax expenditures in the tax code, so if policymakers don’t limit (by keeping the cap) or eliminate this tax subsidy, it will significantly worsen the nation’s long-term fiscal imbalances.
Concentrated Benefits, Dispersed Costs
Aside from its monumental fiscal cost, the SALT deduction is also incredibly regressive, furnishing highly concentrated benefits to the wealthy and dispersed costs to poorer individuals and states. The benefits of the SALT deduction are limited to those at the very top of the income scale, specifically most of the 9% of taxpayers who itemize their deductions. In 2021, less than 11 million [ [link removed] ] tax returns (out of 161 million) deducted state and local income taxes—just 7% of returns.
According to 2021 IRS statistics of income data [ [link removed] ] (Table 2.1), 99% of the value of tax benefits from the SALT deduction goes to earners making more than $100,000 a year, while 68% goes to an even smaller group of less than 1.5 million earners making more than $500,000 a year.
The benefits are concentrated not just among the highest earners, but also among a handful of high-income or high-tax states, implying a transfer from low-income to high-income states through this deduction. Those high-income taxpayers who benefit from the SALT deduction tend to be concentrated in affluent states such as [ [link removed] ] California, New York, New Jersey, Connecticut and Illinois.
The deeply regressive nature of this tax expenditure has serious adverse economic consequences. For example, the SALT deduction contributes to economic segregation by subsidizing wealthy communities at the expense of poorer communities. One 2020 article [ [link removed] ] found that the SALT deduction “provides a greater subsidy, per capita, for wealthy, economically segregated localities because only those localities have a critical mass of wealthy taxpayers who claim the deduction. This allows wealthy localities, but not poor localities, to provide services at a cost less than face value to their residents.”
The author concludes that the SALT deduction “likely contributes to economic segregation because it provides an incentive for the wealthy to segregate into wealthy, subsidized localities over less segregated and less subsidized localities.”
Distorting State Tax Competition
Not surprisingly, the SALT deduction also distorts the financing decisions made by state and local lawmakers. As Veronique de Rugy pointed out [ [link removed] ] in 2016, for instance:
Alaska Gov. Bill Walker cited SALT as instrumental in proposing a hike in income taxes over a hike in the sales tax. He said, “We selected an income tax over a sales tax for a couple of reasons. ... State income taxes are deductible from your federal taxes.” Translation: “Thanks to SALT, we can increase your taxes without upsetting you as much as we should.”
Therefore, the SALT deduction influences the types of taxes that state and local governments implement, biasing them toward choosing taxes that are deductible rather than those that are most efficient. It is no surprise, then, that prior research [ [link removed] ] on the SALT deduction has found that it results in increases of state and local taxes by about 13%-14%.
In other words, SALT not only shifts the tax burden from high-income individuals to federal taxpayers, but it also allows state governments to increase their tax burden knowing that much of it will be deductible at the federal level. This is a lose-lose.
The preferential tax treatment of the SALT deduction also distorts market signals and violates the principles of equal tax treatment. For example, in states and communities where libraries, garbage collection or education are largely provided by state and local governments, the taxes that fund these services may be deductible. However, in states and communities where many people access these services through private entities (such as private schools), fees paid for these services are not deductible. This means the private sector has less incentive to provide these services, even when it might be more efficient for private companies to do so than for the government.
It's Time To Cut SALT Out of Our Diet
The most fiscally prudent action would be the full repeal of the SALT deduction. However, policymakers could still demonstrate fiscal rectitude without full repeal by extending the existing $10,000 SALT deduction cap beyond 2025. The deduction could be limited further by lowering the cap to $5,000 for single and head-of-household filers, as suggested in a proposal [ [link removed] ] by the American Enterprise Institute.
Policymakers could also fix the SALT work-arounds [ [link removed] ], enacted in 36 states, that allow some businesses to skirt the SALT cap entirely. Because of these work-arounds, the SALT cap has only raised about 80%-85% [ [link removed] ] of what it was intended to raise, costing the Treasury about $20 billion a year.
Renewing the SALT deduction cap represents a critical opportunity for policymakers to demonstrate fiscal responsibility and prioritize the long-term economic well-being of the nation. While full repeal of the SALT deduction would be the most fiscally responsible course of action, extending the existing $10,000 cap would send a strong signal that policymakers are committed to addressing the nation's fiscal challenges.

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