President-elect Donald Trump is considering the immediate extension of his 2017 Tax Cuts and Jobs Act (TCJA). Unfortunately, in proposing to extend the TCJA, he is reportedly considering reversing or modifying its provision limiting the state and local tax (SALT) deductions for individual taxpayers to $10,000. Reports suggest he is considering two possibilities: restoring the unlimited SALT deduction which was in effect prior to TCJA or doubling the maximum deduction to $20,000. Either option would be representative of poor tax policy and even worse political strategy.
While extending the TCJA aligns with Trump’s campaign promise to continue his tax cuts, reinstating the unlimited SALT deduction or increasing the cap would be a misstep. To enhance tax cuts under the TCJA, the President-elect should focus on reducing individual tax rates for all taxpayers or increasing the standard deduction. These measures would stimulate the economy, achieve broader tax fairness, and avoid criticisms that a second Trump administration will prioritize tax breaks for the wealthy.
President Trump’s decision to limit the SALT deduction in his TCJA corrected a century-old inequity. Reversing this progress would undermine the principle of fairness that federal taxes should be based on income, not residence.
Maintaining the $10,000 SALT deduction cap achieves four critical objectives: preserving the TCJA’s historic achievement of ensuring equal federal taxes for taxpayers with identical incomes regardless of the state in which a taxpayer has residence, maintaining a robust standard deduction that eliminates the need for most taxpayers to itemize deductions, avoiding a change to the TCJA that would benefit only the wealthy, and eliminating any encouragement for high-tax states from raising their tax rates even higher.
TCJA’s $10,000 cap on SALT deductions established tax equity among taxpayers nationwide. Previously, residents of high-tax states received a significant reduction in their federal taxes as the result of the availability of an unlimited SALT deduction. (While there was some amelioration of the tax benefit from the unlimited state tax deduction as the result of the alternative minimum tax, there remained significant tax benefit from the unlimited deduction.) Under this previous law, which was in effect for more than 100 years, taxpayers with identical income paid significantly different federal taxes based upon their state of residency.
With unlimited or increased SALT deductions, either higher federal tax rates will need to be imposed on all taxpayers with that increase in federal tax rates being disproportionally shared by low-tax rate state residents who do not garner benefit from the SALT deduction increase and/or federal deficits will be greater. Either way, residents of high-tax states will obtain a benefit not shared by residents of low-tax rate states. By capping the SALT deduction, the TCJA ensured taxpayers with equivalent incomes paid comparable federal taxes, regardless of their state’s tax and social policies. This is in concert with the theory that federal taxes should not reflect whether a state has higher or lower tax rates for its residents.
States have the autonomy to determine their own tax laws and tax rates, tailoring them to their specific societal goals. For example, one state might choose to fund free college tuition through higher taxes while another state might choose not to implement this policy. Such decisions should not influence the federal tax obligations of the residents of either state. Californians choosing higher state taxes for expansive social programs should not decrease Californians federal income taxes relative to the tax obligations of residents of other states.
The TCJA’s reforms, including a higher standard deduction, simplified tax filings significantly. The share of taxpayers using the standard deduction surged from 68.6% in 2016 to 88.6% in 2022; some 15 million additional taxpayers stopped itemizing their deductions and used the standard deduction. Removing the SALT cap would force millions back into itemizing deductions, increasing costs for professional tax preparation and requiring countless hours of additional paperwork to complete their tax returns.
Tax simplicity fosters public trust and administrative efficiency. A return to pre-TCJA complexities would erode these benefits and provoke political backlash. Voters leaving the standard deduction and returning to itemizing deductions would remember both their increased costs of tax preparation as well as the additional time needed to file their annual income tax returns in future elections.
Eliminating the SALT cap would overwhelmingly benefit the wealthiest taxpayers, contradicting the administration’s stated goals of broad-based economic growth. For instance, a $20-million-per-year professional athlete in California could see a federal tax reduction approaching $1 million if the SALT cap were removed, while standard deduction users would gain nothing. Those not gaining one dollar of benefit from either an increase to $20,000 or the elimination of the cap altogether would represent more than 70% of taxpayers and 100% of non-taxpayers. Politically, that calculation alone should end any discussion of eliminating the cap or doubling the maximum to $20,000. Windfalls for high-income earners only amplify perceptions of a regressive tax policy favoring the wealthy.
Moreover, restoring unlimited SALT deduction or increasing the maximum SALT deduction could or would embolden high-tax states to raise their taxes knowing their wealthy residents’ federal taxes would decline upon the restoration of greater SALT deductions. This would divert economic benefits intended for private investment and consumer spending to the coffers of high-tax states.
By retaining the $10,000 SALT deduction cap, President-elect Trump can prevent criticisms that the TCJA extension disproportionately benefits the wealthy—an inevitable consequence of removing the cap.
Rather than reinstating unlimited SALT deductions or increasing the maximum deduction, the administration should prioritize policies that provide broad benefits. Adjusting individual tax rates or further increasing the standard deduction could achieve comparable revenue reductions while preserving fairness and simplicity.
The TCJA’s SALT deduction cap was a landmark reform, leveling the playing field for taxpayers across all states. Reinstating the unlimited SALT deduction would undo this progress, reintroducing inequities that plagued the federal tax system for over a century. President Trump should defend and build on this achievement rather than reverse it.
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