Repealing the SALT Cap: State-by-State Impacts

Matt Jensen

Donald J. Boyd

Donald J. Boyd is the co-director of the State and Local Government Finance Project at the Rockefeller College of Public Affairs & Policy at the University at Albany and principal of Boyd Research LLC. Matt Jensen is the director of the Open Source Policy Center at the American Enterprise Institute. The authors thank Alan D. Viard and participants at the Policy Simulation Library’s Demo Day series for their helpful comments.

In this report, Boyd and Jensen examine how the repeal of the state and local tax cap in 2021 would affect federal revenue and the tax liabilities of taxpayers in each of the 50 states.

The views expressed in this report are solely those of the authors and do not necessarily reflect the views of any other person or institution.

The Tax Cuts and Jobs Act imposed a $10,000 cap on the itemized deduction for state and local taxes from 2018 through 2025. This change has had widely varying effects on taxpayers depending on where they live, their income levels, and other important characteristics.

In this report,¹ we examine how the repeal of the SALT cap in 2021 would affect federal revenue and the tax liabilities of taxpayers in each of the 50 states. Our analysis relies on a unique database designed to approximate the taxpaying population in each state, developed using re-weighting and extrapolation routines. The analysis does not include possible behavioral effects of the reforms. The appendix provides additional detail regarding the methods.

The SALT cap repeal would influence taxpayers differently based on itemization status, tax bracket, and state and local taxes paid. Among itemizers, those in low tax brackets facing low marginal tax rates would be less affected than taxpayers with higher marginal rates. Itemizers facing high marginal tax rates with high state and local taxes would see the greatest impacts.

Repealing the SALT cap in 2021 would reduce federal income tax liability by approximately $91 billion, or 7.2 percent. Over 50 percent of this reduction would accrue to taxpayers in just four states: California (25.1 percent), New York (16.8 percent), New Jersey (6.4 percent), and Illinois (4.2 percent). Nationally, nearly 90 percent of the tax reduction would benefit taxpayers with adjusted gross incomes of $200,000 or more, and almost half of the tax reduction would go to taxpayers with incomes above $1 million. Over half of the $22.9 billion benefit in California would go to taxpayers with more than $1 million of AGI. In New York, the state with the highest average benefit per taxpayer, taxpayers with AGI between $50,000 and $75,000 would on average receive a tax reduction of $66, while the average taxpayer with over $1 million of income would receive a tax reduction of more than $144,000, more than double the national average for this income group.

National Impact

We estimate that the SALT cap repeal would reduce federal income tax liability in 2021 by approximately $91 billion, or 7.2 percent.² About half of the benefit would go to those earning more than $1 million a year, with roughly 90 percent going to those with AGIs of $200,000 or more (Table 1).³

Taxpayers with income below $50,000 would receive a negligible benefit of roughly $100 million. Indeed, the entire group of taxpayers with income below $100,000 would receive only $1.4 billion of the $91 billion reduction in liabilities. The largest percentage reductions would go to those with AGIs of $500,000 or more; this group would garner nearly two-thirds of the tax reductions (65.8 percent).

In the state with the greatest aggregate benefit from the reform, California, the impact by income group largely reflects the national distribution (Figure 3). Taxpayers with incomes over $1 million capture over 52 percent of the tax reduction, and taxpayers with incomes over $200,000 capture nearly 92 percent.

The average taxpayer with income above $1 million in 2021 would receive a tax reduction of more than $70,000 — more than 60 times as large as the average overall reduction of $1,076 (Table 2). When we calculate average tax liability, we exclude taxpayers with negative liabilities, which can result from tax credits, because these records can make results difficult to interpret.

Middle-income taxpayers with incomes between $50,000 and $75,000 would receive an average tax reduction of $23. Aside from their smaller tax payments and lower marginal tax rates, most of those taxpayers claim the standard deduction rather than itemized deductions and therefore do not benefit from the SALT deduction.

Table 2 shows the percentage change in an expanded measure of income after federal taxes.⁴ The largest percentage increases in after-tax income, by far, would go to taxpayers with income over $1 million.

State-by-State Impacts

The state-specific impacts of the repeal would vary greatly based on factors such as the level of state and local taxation, local property values, and sources and amounts of income and deductions of taxpayers in the region. In this section, we focus on state-by-state variation, reporting the aggregate change in total tax liabilities by state and the average impact per taxpayer by state.

Impact on Total Tax Liability. We estimate that over 50 percent of the reduction in tax liabilities would accrue to taxpayers in four states: California (25.1 percent), New York (16.8 percent), New Jersey (6.4 percent), and Illinois (4.2 percent). (See Figure 1.) The top 10 states by impact, California through Maryland in the figure, would garner over 70 percent of the liability reduction.

Kentucky, as the 25th state, marks the approximate halfway point. Its taxpayers would receive about 0.6 percent of the aggregate U.S. tax cut, or a little over half a billion dollars. States below Kentucky would receive smaller cuts.⁵

Impact on Average Tax Liability. In New York, whose taxpayers would have the largest average tax reduction, the tax bill under current law would fall 9.2 percent on average, or more than $2,700 per taxpayer (Figure 3). Taxpayers in three other states — Connecticut, California, and New Jersey — would see average reductions of over $2,000. Taxpayers in Ohio, the 25th state by this measure and the approximate halfway point, would see average tax reductions of just over $600.

Some states, because of their size, rank high by aggregate tax reduction but low by average tax reduction per taxpayer. For instance, only eight states have higher aggregate tax reductions than Texas, but taxpayers in 38 states accrue larger average tax reductions. California, New York, New Jersey, and Massachusetts rank in the top five under both measures.

Data and Methods

We analyzed the impact of repealing the SALT cap by applying Tax-Calculator, a widely respected open-source microsimulation model of the federal income tax, to a custom-developed database of more than 250,000 income tax returns.⁶ Tax-Calculator is regularly tested against tax forms and other federal tax models and is used by federal policymakers in their day-to-day work. Tax-Calculator was involved in the private policy development and public discussion of the TCJA and precursor proposals, including by journalists at The New York Times, CNN, and The Washington Post.⁷

Tax-Calculator requires as input a database of records suitable for calculating taxes, such as anonymized tax returns. A companion project, TaxData,⁸ produces such a file for the United States as a whole by taking IRS anonymized and blurred tax records, known as the Public Use File;⁹ enriching it with data from other sources, such as the Current Population Survey; adding imputed values for some benefit programs; and extrapolating it to years that are relevant for tax policy analysis.

For this project, we began with the latest TaxData-enhanced file and adjusted it so that it was representative of the last pre-TCJA tax year, 2017. We targeted national values for numbers of tax return filers and for components of income and individual itemized deductions by detailed income range so it was consistent with published national IRS statistics.¹⁰ We targeted 43 variables for each of 18 income ranges, with a few exceptions, coming within 0.1 percent of the goal for almost every target. We paid especially close attention to the deduction for SALT paid.

We then apportioned each tax record’s weight to the 50 states in a manner that ensured that weighted totals were as consistent as practical with IRS data by state and income range as published in IRS Historical Table 2.¹¹ In cases in which published IRS data for the sum of the states did not equal published IRS data for the nation, we adjusted state targets pro rata so they summed to the national total.¹² For each state, we targeted 22 variables in each of 10 income ranges, with a few exceptions. We had more than 10,000 state-level targets (200-plus targets per state, times 50 states), and we came within 0.01 percent of the goal for more than 95 percent of the targets. In almost all cases, we hit our state-specific targets for the deduction for taxes paid precisely. Our method ensures that tax policy estimates for the individual states sum to national estimates.¹³ We then extrapolated the file to the 2021 tax year. The details of our method are described in a Policy Simulation Library blog entry¹⁴ and in associated links.