SALT Blog - SALT Blawg

By Pete Lowy & Nga Tran-Medina

The officiant at your wedding probably didn’t conclude with: “I now pronounce you eligible to pay more in federal income taxes now that you’re husband and wife” (unless perhaps a Tax Court judge presided over your nuptials).  But maybe they should have.  It’s well known that married couples pay a “marriage penalty” – a general term for the various Code provisions and tax computations that make the total tax liability of spouses more than the sum of their individual tax liabilities if they had been allowed to file as being single.  

These marriage penalty provisions include the earned income tax credit (EITC), standard deductions, and the Social Security benefit tax.  Not surprisingly, provisions that penalize marriage are politically vulnerable.  Tax policy should not punish the institution of marriage.  Indeed, Congress has repealed and modified tax provisions that make married couples worse off tax-wise.  This includes adjusting new EITC income thresholds, standard deduction amounts to correspond to the change of the filing status, and the difference in the Social Security base amount between married couples and singles.

Leveraging the unpopularity of provisions that cause the marriage penalty, a bill was introduced this month to weaken the much-maligned SALT cap by casting it as anti-marriage.  Congress enacted the SALT cap as part of the 2017 Tax Cuts and Jobs Act (TCJA) in part to help finance the TCJA and mitigate its impact on the national deficit.  The cap generally limits taxpayer’s federal itemized deduction for state and local taxes to $10,000 for all filing statuses.  While the standard deduction for married couples is double that of a single taxpayer, the TCJA imposed the $10,000 cap on the itemized deduction for state and local taxes for both married filing jointly and single taxpayers.  The scenario creates a marriage penalty, as two singles filing separately would collectively receive a total deduction of $20,000, underscoring the disparity faced by married couples.

Prior to the TCJA, taxpayers were able to deduct the full amount of their state and local taxes, subject to statutory limits on itemized deductions, with property and income taxes as the primary drivers of the SALT deductions.  Theoretically, the deduction exists to offset the taxpayer’s tax liabilities to state and local governments.  Taxpayers from states with high income taxes (namely California, New York, New Jersey, and Connecticut) benefitted from the unlimited SALT deduction.  Not surprisingly, the same taxpayers were disproportionately burdened by the imposition of the SALT cap.

On the heels of the TCJA, there were efforts to kill the cap, which ranged from attempts to repeal it, to Constitutional challenges, to state law workaround statutes.  For example, the states of New York, New Jersey, Connecticut and Maryland filed suit in the U.S. District Court for the Southern District of New York challenging the constitutionality of the cap.  The states contended that the SALT deduction was mandated by Section 8 of Article 1 of the 16^th Amendment, and that the cap was politically driven and targeted particular states.  However, the district court was unpersuaded by their arguments and dismissed the lawsuit.  The Second Circuit affirmed the judgment.

Most recently, as part of the ongoing efforts to kill (or at least substantially ameliorate the effect of) the cap, a pending bill, H.R. 7160, introduced by New York republicans, takes a creative tact: brand the SALT cap as anti-marriage.  H.R. 7160 would double the SALT cap for married filers from $10,000 to $20,000, with a gross income cap at $500,000 for the joint return for the 2023 tax year.  Anticipating claims that repeal of the SALT cap is regressive, H.R. 7160 limits the increased deduction to those earning under $500,000; otherwise, the current $10,000 cap would remain in place. 

Any elimination or mitigation of the SALT cap, however, faces headwinds.  A return to a full or larger SALT deduction is likely regressive.  It disproportionately advantages high-income taxpayers.  This has always been the case and only gets worse as the standard deduction increases, resulting in fewer lower income taxpayers itemizing their deductions and thus having any use for a SALT deduction.  The standard deduction is currently at an all-time high – $13,850 for single taxpayers and $27,700 for married couples filing jointly for the 2023 tax year.  For more on the regressive nature of the SALT deduction, see www.chamberlainlaw.com/salt-blawg/salt-cap-conundrum.

There is also a perception that the SALT deduction causes taxpayers in low-tax states to subsidize taxpayers in high-tax states.  In essence, the SALT deduction lowers the Federal effective tax rate for people in high-tax States more than it does for people in low-tax States because the former receives larger Federal tax deductions than the latter for their state and local tax payments.  Congressman Matt Gaetz, in opposition to H.R. 7160’s proposal to raise the cap, made a version of this point: it’s unfair for “low-tax states . . . to subsidize people in high-tax states because you guys have a bunch of goons in your state legislatures and on your local governments who want to take more of your money.”  Then-Speaker of the House Paul Ryan shared a similar sentiment: “people in states that have balanced budgets, whose state governments have done their job and kept their books balanced and don’t have massive pension liabilities, they’re effectively paying for states that don’t.”  

And let’s not forget the price tag.  According to the Tax Foundation’s Taxes and Growth model, the cost of H.R. 7160’s proposed change is $11.7 billion for the year 2023.  The Penn Wharton Budget Model estimates that the bill would cost $12 billion over the 10-year budget window, with the entire cost falling in fiscal 2024.  Former House Speaker Paul Ryan, who, ever since passage of the TCJA over which he played an important role, continues to champion the complete elimination of the SALT deduction, says the SALT cap results in a nearly $2 trillion revenue swing over a decade, which could be used to potentially aid more progressive aspects of the tax laws. 

There also are competing proposals to reform the SALT cap.  Bills have been introduced to Congress to raise the cap for all married filers, including those with AGI greater than $500,000 (H.R.339); remove the marriage penalty and raise the maximum SALT deduction to $200,000 for married filers and $100,000 for all other filers (H.R. 680); and expedite the upcoming 2026 expiration of this portion of the Internal Revenue Code and return the deduction to pre-2017 TCJA law (H.R.160). 

As policymakers weigh these options, the future of SALT cap reform remains a fluid and intricate process, influenced by the interplay of political, economic, and social factors.  Historically, the SALT deduction was widely popular and bipartisan.  For more on the deduction’s bipartisan history, see www.chamberlainlaw.com/tax-blawg/history-of-the-salt-deduction.  When the SALT deduction was capped in the TCJA, however, the issue turned into a wedge issue, dividing democrats and republicans, and dividing legislators from high-tax and low-tax states. 

As for H.R. 7160, on Valentine’s Day it didn’t receive much love.  In the rules committee, H.R. 7160 was tied to a House resolution that was a non-starter with democrats, causing the measure to be voted down.  It is now subject to a motion to reconsider.  If Congress advances H.R. 7160 or similar legislation, but without the baggage of things like added resolutions that destine the bill for failure, rebranding the SALT cap as antithetical to the institution of marriage could reunite policymakers from different political parties and from diverse parts of the country.