More recently, former President Donald Trump said he would seek to abolish the state and local tax deduction cap if his presidency is restored in 2024. That would be a significant policy about-face for Trump-who played a crucial role in implementing the $10,000 cap in the first place as part of his administration’s TCJA back in 2017. That would be a monumental policy flip with far-reaching consequences, especially for taxpayers in states that keep taxes high.
Background on SALT deductions
The SALT deduction allows a taxpayer to subtract selected taxes imposed by states and localities from the taxpayer’s federal taxable income. Prior to the enactment of the TCJA, these were fully deductible without limit-a particular boon for residents in high-tax areas.
The TCJA capped the SALT deduction at $10,000 per filer; that change hit particularly hard for taxpayers who resided in high-tax states like New York, New Jersey, and California. This cap was intended to offset some of the other tax cuts included in the bill; however, it showed fierce resistance among those in high-tax states for whom this change felt like a penalty.
This cap has remained unpopular among Democrats and even many Republicans since it was introduced. Its opponents liken it to the cap’s targeting citizens of the blue states to the benefit of those people in the low-tax areas. In this regard, proponents who support the retention of the cap say that it bars richer people from getting the most enormous tax breaks.
Trump’s proposal to restore SALT
In a recent post on Truth Social, Trump said that if he returns to the presidency, he will “bring back SALT” and cut taxes. This raised eyebrows, since the comment ran counter to his policy decisions. He is now promising to lift and even totally eliminate the cap on SALT to win over voters in high-tax states who have been hurt by the limitation.
While Trump did not offer any detail on how he would make this change, what’s clear is that his proposal seeks to curry favor with constituents who have been feeling particularly strained by higher state and local taxes. His comments came ahead of a campaign rally in Long Island, N.Y., where many residents have felt the financial pinch of the SALT cap.
Political reactions and implications
The Trump plan has been getting a mixed reception from the GOP. A number of high-tax state GOP lawmakers have emerged to back lifting the cap, but much of the party is still leery about fattening tax deductions that could inflate federal deficits. Critics within the party say it is irresponsible for the party to let up on the SALT cap when revenue from it helps finance other tax cuts created under the TCJA.
Senate Majority Leader Chuck Schumer said Trump’s flip was a political one and “reflects an attempt to curry favor with New Yorkers after bruising them with policies that hurt them.” Schumer has championed the lifting of the SALT cap and promised he would do so if he were to stay in leadership.
For its part, the Committee for a Responsible Federal Budget estimates that removing or increasing the SALT cap could increase federal deficits by roughly $1.2 trillion over a decade. That number will gin up fiscal responsibility concerns among conservative deficit hawks.
Economic considerations
The economic effects of lifting or abolishing the SALT cap are not straightforward. While the full restoration of SALT deductions would instantly yield tax cuts to many taxpayers in high-tax states, this change would indeed be associated with formidable federal revenue losses. Critics also contend that such changes would primarily benefit wealthier households paying higher state and local taxes, therefore exacerbating income inequality.
Meanwhile, other larger tax initiatives he has pursued such as exempting overtime earnings and Social Security benefits from taxes could add to these fiscal woes. It is the aggregation of these kinds of proposals that, if all proposed changes were implemented, could lead to an estimated $4 trillion increase in federal deficits over ten years.
But as Trump tinkers with his campaign strategy to win the 2024 election, the SALT deduction position will no doubt continue to remain salient and contentious for not only voters but also policymakers. Any reversal of this salient element of his own tax policy underlines both a shift in strategy and acknowledgment of shifting political dynamics in order to win back constituent support that earlier decisions had disappointed.
