There has been a lot of discussion amongst government leaders about the cap on state and local tax (SALT) deductions. The Biden Administration’s Build Back Better Act proposes raising the cap, currently set at $10,000, to $80,000.
But what is the SALT cap? And how would a potential raise of the cap affect West Virginians?
According to an explanation from the Tax Foundation, SALT deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. This means those that take the standard tax deduction and do not itemize their tax return, are not really affected by the potential change.
“Historically, the people who itemize are actually sort of wealthier if you think about it,” said Elaine Waterhouse Wilson, Associate Dean for Academic Affairs and Professor of Law at West Virginia University’s College of Law. “People who have big mortgages, people who pay a lot in state and local taxes which include property tax, and people who can afford to make a lot of gifts to charity. So in large, the itemizers tend to be on the higher end of income tax scale.”
In 2017 during the Trump Administration, the Tax Cuts and Jobs Act (TCJA) raised the amount of the standard deduction. To help pay for that increase, SALT deductions were capped at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.
According to Waterhouse Wilson, prior to 2017 the amount you could deduct was basically unlimited. “However much you paid in state tax and however much you paid in property tax, you pretty much got that amount. You can imagine if you are a higher income taxpayer, that number could get very big very fast,” she said. “So by putting the $10,000 cap on it, it was specifically denying the deductions from people with really high property taxes.”
Waterhouse Wilson said a lot of lower and middle class Americans actually never take these deductions because even when they add up their mortgage, their state and local taxes, and their charitable donations, it is not more than the standard deduction. So in a lot of instances, even prior to 2017, you had to have a pretty significant amount of those three primary deductions to overcome the amount of the standard deduction.
States that have high property and local taxes like New York, New Jersey, and California, wealthy blue states, were the ones hit hardest by the cap.
In West Virginia, the majority of taxpayers take the standard deduction and will never have to worry about the SALT tax cap.
“We don’t have huge property taxes here, we don’t have huge state and local taxes here, and our charitable giving – you have to have money to give away. Frankly we are at the low end of the national scale when it comes to four person family income,” Waterhouse Wilson said. “So the vast majority of West Virginians take the standard deduction. They don’t do itemized, so they won’t actually ever run into the state and local tax cap.”
According to Waterhouse Wilson, a lot of the states that were affected by the $10,000 cap started coming up with loopholes or ways to work around the cap. They basically found ways to characterize payments to the state as something like charitable donations so the taxpayer wouldn’t be subject to the cap.
The newly proposed cap of $80,000 works to combat some of those loopholes, but has left Democrats in Washington divided.
“Some of the more progressive Democrats say that raising the cap would really just be another tax break for the wealthy,” said Waterhouse Wilson. “Then you have these folks representing the suburban areas of New York, New Jersey, and California rightfully saying people are getting around it anyway, so let’s up this cap.”
The higher cap amount would allow people to deduct more SALT taxes, but again, this only affects those who are itemizing their returns, which according to Waterhouse Wilson is usually about the top 20% of taxpayers.
After having passed in the House, there is a group of more progressive senators who think we should put a cap on the amount of wealthy people who could take the deduction instead of putting a cap on the amount that can be deducted. According to Waterhouse Wilson, this would mean people who make over a specified amount would not be eligible to receive the deduction, instead of everyone being capped at a certain amount.
Waterhouse Wilson said this way we could accomplish restoring that deduction to many of the upper middle class people, but still not give away anything to the ultra wealthy
“Everybody wants to do something because they recognize the political problem that has been created, but there is a real sensitivity in acknowledging that this is really a tax break for the higher ends of the income spectrum,” she said.
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