“Middle-Class” Taxpayers Don’t Have $40,000 State Tax Bills

As the Senate prepares to take up the reconciliation bill, one area of possible disagreement is over the State and Local Tax (SALT) deduction. While a small group of blue-state Republicans was able to use the narrow Republican majority to quadruple the SALT cap in the House version, they hold no such leverage over the Senate. As the chambers prepare to do battle over the future of the deduction, they should keep in mind how misleading it is to claim that the benefits will go to the middle class.

Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the SALT deduction itself was not directly capped. However, the amount of state and local taxes that taxpayers could deduct was limited in two other ways. First was the Pease limitation, which limited the value of itemized deductions above a certain income threshold.^[1] Second was the Alternative Minimum Tax (AMT), a parallel tax code that applies regardless of itemized deductions.

The TCJA instituted a new $10,000 cap on the SALT deduction, while at the same time lowering rates across the board, nearly doubling the standard deduction, repealing the Pease limitation, and significantly raising the amount of income that could be exempted from the AMT. Taken together, this means that even taxpayers who were able to deduct less under the SALT deduction were almost always better off due to tax changes elsewhere.

However, advocates of raising the cap want to have their SALT and eat it too. Without changing any of the other above changes, the House version of the reconciliation bill would institute a $40,000 SALT cap, albeit with a $500,000 AGI phaseout. SALT advocates would have you believe that this is an important change for the middle class, but the reality is far from it.

Take taxpayers in four of the states that benefit most from the SALT deduction. Table 1 estimates the state/local tax burden based on some median figures. Note that the hypothetical filers in the below examples are actually far better off than the “median taxpayer,” as the data below assumes homeownership and property tax bills as well as median family income for a three-person household rather than just median income

State	Median Household Income2	Income Tax Bill3	Avg. Effective Property Tax Rate4	Median Home Value5	Property Tax Bill	Total state tax bill
California	$112,536	$3,197	0.70%	$854,700	$5,983	$9,180
Connecticut	$126,343	$5,449	1.48%	$451,100	$6,676	$12,125
New Jersey	$131,173	$4,279	1.77%	$547,500	$9,691	$13,970
New York	$108,589	$4,702	1.26%	$572,700	$7,216	$11,918

Even in these states, your average homeowning family is barely affected by the SALT cap, as they are barely clearing the $10,000 cap as it is. What’s more, unless they have substantial charitable contributions, mortgage interest, or medical/disaster expenses, there is a high likelihood that they are better off taking the $30,000 standard deduction than itemizing under an unlimited SALT cap.

So what does a family that benefits from the entire proposed $40,000 SALT cap look like? Here are some examples in each state. In each case, the family is earning $400,000 and owns a home worth more than $1 million.

State	Household Income	Income Tax Bill	Avg. Effective Property Tax Rate	Home Value	Property Tax Bill	Total state tax bill
California	$400,000	$29,184	0.70%	$1,545,143	$10,816	$40,000
Connecticut	$400,000	$21,500	1.48%	$1,250,000	$18,500	$40,000
New Jersey	$400,000	$21,215	1.77%	$1,061,299	$18,785	$40,000
New York	$400,000	$22,345	1.26%	$1,401,190	$17,655	$40,000

Senators receiving the reconciliation bill from the House should not be misled into thinking that the SALT cap is hurting middle-class Americans. The only group truly hurt by the SALT cap is high-tax states that can no longer tell their wealthy residents that at least the latest tax increase means they get a bigger SALT deduction.