In a last-minute deal before the July 4 recess, Congress passed the One Big Beautiful Bill Act (OBBB), raising the state and local tax, or SALT, deduction cap to $40,000—a significant win for high-tax states like New York and California. However, the move has sparked debate among fiscal conservatives.
The SALT deduction, established in 1913 alongside the federal income tax, allows taxpayers who itemize to deduct state and local taxes—including property, sales, and income taxes—from their federal taxable income. Uncapped until 1986, when the sales tax deduction was eliminated, it was restored in 2004. The 2017 Tax Cuts and Jobs Act capped the deduction at $10,000 for married couples ($5,000 each for those married filing separately), benefiting taxpayers in high-tax states. However, political divides emerged, with Democrats pushing for tax relief and Republicans cautious about subsidizing high-tax states.
Key SALT provisions in the OBBB include a temporary cap increase to $40,000 ($20,000 each for married couples filing separately), effective in 2025, with a 1% annual increase through 2029. The deduction phases out for modified adjusted gross income (MAGI) above $500,000, reduced by 30 cents per dollar over the threshold, with a floor of $10,000. The cap reverts to $10,000 in 2030, reflecting the Senate’s temporary measure, diverging from the House’s proposed permanent cap. The Senate version includes pass-through entity tax (PTET) workarounds, allowing some entities to bypass the cap and rejecting House restrictions on specified service trades or businesses, such as law and accounting firms.
Critics argue the new SALT provisions favor high-income earners, offer limited relief to middle-class families, and may lead to tax hikes in high-tax states. The pass-through entity tax workarounds are criticized for enabling wealthy business owners to evade the cap entirely. The 2030 sunset clause is also said to create uncertainty for taxpayers and state governments. Grover Norquist of Americans for Tax Reform said, “Think of the deductibility of SALT as a subsidy for big government at the state and local levels. It helps mayors and governors sell higher state and local taxes.” He went on to say, “The deductibility of SALT requires Americans in all states to pay the taxes of higher-income Americans in blue cities in blue states. If all state and local taxes were deductible, it would shift $1.2 trillion in taxes onto the rest of us. That is a significant subsidy to keep Democratic mayors and governors from having to govern effectively.”
Supporters, particularly Democrats, argue that SALT relief mitigates double taxation, especially in high-cost areas. The phase-outs are a compromise to limit benefits for the ultra-wealthy. Sen. Chuck Schumer stated, “I have been a loud proponent of eliminating the SALT cap from the start. As long as I am Leader, I’ll do everything in my power so that when these caps expire at the end of next year they will not come back.”
Beyond SALT, the OBBB includes provisions for the child tax credit, permanent Tax Cuts and Jobs Act cuts, and clean energy incentives. Taxpayers are encouraged to consult financial advisers to maximize OBBB benefits. The SALT debate highlights the challenge of balancing regional tax disparities with federal fiscal responsibility in an evolving tax landscape.