Seven states, among them California and Illinois, are set to implement legislative workarounds to skirt the restrictive State And Local Tax (SALT) deduction cap implemented by the federal government in the massive 2017 Tax Cuts And Jobs Act (TCJA). They join New York and several other states in working to allow taxpayers to deduct more than the federally mandated SALT deduction maximum of $10,000.
Governor Andrew Cuomo has, like the leaders of other states, publicly called for the Biden administration to undo the SALT limit. Even just raising the cap instead of abolishing it totally would still offer myriad benefits.
Why are such workarounds necessary?
The lawmaking actions, such as those recently instituted by New York and Idaho, are coming because most taxpayers need additional credit for SALT paid into state coffers. The TCJA included significant tax cuts for big corporations, but lessened many deductions offered to smaller taxpayers.
In New York alone, according to data compiled by the IRS, there are several districts where people lose out on upwards of $100,000 annually because of the SALT limitations. New York’s legislation created a pass-through option wherein, according to 2020 IRS guidance, several types of business entities like partnerships, S-corps, sole proprietorships, and limited liability companies let income flow through. Businesses like these usually don’t pay direct income taxes because their profit passes through to owners themselves.
Companies can get a credit, not subject to the $10,000 cap, which offsets their business-level tax payments.
Calls for change
Some have called the tax deduction limitations a “partisan attack,” because they affected taxpayers living in Democrat-controlled districts. Statistics also show that there is racial inequality in the way that these tax deductions offer benefits to taxpayers. A cap removal primarily aids white taxpayers making more than $200,000 each year. More significant tax code revisions would be necessary to level the playing field for Black and Latino taxpayers, who are disproportionately impacted by existing tax regulations.