The Senate walked through the looking glass over the weekend.
When the Senate released its revisions to the state and local tax provision of the so-called “One Big Beautiful Bill,” it made a 180-degree turn on the contentious SALT cap. It raised the SALT deduction cap to $40,000 from $10,000 with incomes up to $500,000 through 2029 and will annually adjust the cap for inflation. It also revived a tax loophole allowing pass-through entities to pay state and local taxes and deduct them so individuals can avoid SALT caps.
The change would add to the U.S.’s already ballooning deficit and mostly benefit rich Americans, analysts said.
“SALT benefits people who pay high property taxes and tend to be wealthy,” said Prof. Christopher Berry from the University of Chicago’s Harris School of Public Policy. “They may also subsidize high-tax places by effectively making local taxes less expensive. Neither of these are generally considered desirable policy goals.”
Why did the Senate reverse course?
No one knows exactly why the Senate completely changed course, but many Republicans and Democrats from high-tax states like New York, New Jersey, Illinois and California, have pushed for higher SALT caps to keep their wealthy constituents happy. Many have threatened to vote no to the entire tax bill over SALT alone.
To Adam Michel, director of tax policy studies at Cato Institute, “this is a classic case of backroom dealmaking to win votes. Lawmakers from high-tax states pushed for these provisions as part of negotiations, trading sound tax policy and larger budget deficits for parochial interests.”
Some wealthy households will pay less federal tax, “and some high-tax, primarily Democrat-run states and localities, will be able to raise taxes with the help of these renewed federal subsidies,” he said.
How much would the change cost?
The Senate’s new SALT switcheroo, plus changes in the alternative minimum tax (AMT), would cost $325 billion on net, according to the Committee for a Responsible Federal Budget (CRFB).
AMT aims to ensure high earners pay a minimum amount of federal income tax. To do that, certain high earners calculate their tax liability like everyone else and then again using AMT rules, which limit certain deductions and exemptions. Those taxpayers pay the higher of the two bills.
The Senate wants to extend the AMT exemption but adjust it for inflation. It also plans to adjust AMT phaseout levels.
“The broader consequences are negative—more complexity, bigger deficits, and a tax code increasingly riddled with carveouts,” Michel said.
Are SALT deductions fair?
Wealthy Americans mostly benefit from SALT deductions, but “these people tend to reside in states that are net contributors to the federal government—meaning they pay more in taxes than they receive in benefits—and remain so even after the deductions,” Berry said. “Through that lens, it’s hard for people in other states to argue about fairness of SALT.”
What should the Senate do instead?
“Rather than expand the SALT deduction, the Senate should be eliminating it – not only for high income taxpayers, but businesses as well,” CRFB said. It estimates this could save over $1 trillion.
Some of those savings, Michel said, could also go towards expanding tax relief for a broader base of Americans.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
This article originally appeared on USA TODAY: Senate flips, decides to give rich Americans more SALT in tax bill
