State and local tax deductions are not something most people spend a lot of time thinking about — at least not more than once a year — but the deductions taxpayers can take from them are an important piece of tax policy that has a major impact on government operations.

The State and Local Tax Deduction, or SALT, has been part of the federal income tax structure since it was established in 1913. It is used most often by people who itemize tax deductions — usually those making $100,000 or more. About 80 percent of filers in this income bracket used the SALT deduction, compared with only 11 percent of taxpayers making less than $50,000, according to the Tax Policy Center.

The Tax Cut and Jobs Act (TCJA), passed by the Trump Administration in December 2017, limits the total state and local tax deduction to $10,000. This might not sound like a big deal to those who have never utilized SALT, but it has some major implications for taxpayers and for the federal government.

Implications for Taxpayers

At the most basic level, the less money someone deducts from their taxes, the more money the government receives. If a taxpayer can only write off up to $10,000 of state and local taxes, then anything remaining would go to the federal government unless it is absorbed by other tax credits or deductions.

The amount of taxes charged to an individual differs by state, so some will feel the effects of the SALT changes more than others. In 2016, before the TCJA took effect, California, New York, and New Jersey ranked among the highest for SALT deductions. This is thanks to a combination of wealthy populations and high taxes.

While high-income earners can’t deduct as much under the new SALT regulations, their overall tax bills remained about the same thanks to other changes that took effect under TCJA such as the Alternative Minimum Tax, which changed the tax brackets and decreased the overall tax burden for all but the very highest income earners (more than $1 million per year).

Impacts for the Government

States generally do not conform to federal tax rates, which creates an opening for states to raise taxes, knowing that people are limited by how much they can deduct on their federal taxes. This means an increase in revenue for many states while the TCJA is in effect through 2024. 

According to the Tax Policy Center, Georgia’s revenue over five years is expected to increase $5.2 billion, while Virginia’s is predicted to grow by $4.5 billion. 

The SALT deduction changes also encourage states to rely more on nondeductible taxes, or things that can’t be written off on federal taxes. This includes sales taxes on things like alcohol, tobacco, and gasoline. With those higher taxes, however, presumably come more services to the residents of that state.

Only one year into the TCJA and SALT changes, it’s too early to tell how far these impacts will go for taxpayers and the government. The tax policy could also change again if Democrats win the White House in 2020.

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