The impact of the SALT cap on state income taxation

The state and local tax (SALT) deduction has been a fixture of the U.S. tax code for many years, providing significant financial benefits to a large number of taxpayers. However, the cap enacted in the Tax Cuts and Jobs Act (TCJA) of 2017 has significantly impacted taxpayers who itemize their deductions, particularly those living in high-tax states like California, New York, and New Jersey. Now, with the introduction of the ‘One Big Beautiful Bill Act’ to extend the SALT deduction cap, the debate over this issue has reignited. In this article, we will discuss the current status of the SALT cap, its impact on state finances, and how you can keep up with potential changes that may affect your clients’ tax liability.

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What is the current SALT cap?

How the SALT cap affects state budgets

SALT cap provisions in the One Big Beautiful Bill Act

How to stay up-to-date with changing SALT deduction legislation

What is the current SALT cap?

The current SALT cap, which applies to tax years 2018-2025, is set at $10,000 ($5,000 if married filing separately). The state and local tax deduction has been a long-standing feature of the U.S. tax code, allowing individuals to reduce their federal taxable income by the amount they pay in state and local taxes. However, the Tax Cuts and Jobs Act introduced a cap on this deduction.

The $10,000 cap applies to the combined total of state and local taxes, encompassing property, income, and sales taxes. This limitation has had a particularly pronounced impact on taxpayers in high-tax states such as New York, California, and New Jersey. Previously, these individuals could often deduct well over $10,000, mitigating the effects of their higher state and local tax burdens. Now, the cap restricts the total deduction to $10,000, irrespective of the actual taxes paid.

How the SALT cap affects state budgets

The cap, which limits the amount of state and local taxes that can be deducted from federal income taxes, has far-reaching consequences. For residents, it means reduced federal tax savings, which can lead to a higher overall tax burden. This, in turn, affects state budgets as residents have less disposable income to spend on local goods and services, potentially leading to a decrease in sales tax revenue. With the cap in place, residents are less likely to see the same level of tax relief, which can strain state finances.

For example, New York has seen a significant drop in the number of residents itemizing their deductions, as the cap makes it less advantageous. This shift has not only reduced federal tax savings but also altered the state’s revenue landscape, forcing legislators to reconsider their fiscal strategies. Similarly, California, with its high property and income taxes, has faced similar challenges, leading to discussions about the sustainability of its tax structure.

To offset the SALT cap’s impact, state budgets have undergone adjustments. A common strategy has been to seek alternative sources of revenue. This may involve raising other taxes, like sales or excise taxes, to make up for the diminished federal tax benefits. Other states have explored reducing spending, which could impact public services and infrastructure.

Another approach has been the adoption of a pass-through entity tax (PTET) by many states. The PTET allows pass-through entities, such as partnerships and S corporations, to pay state income tax at the entity level and claim a deduction on their federal income tax returns. This, in turn, causes less income to be passed through to the individual owners. By electing into a state’s PTET, business owners can effectively workaround the SALT cap.

SALT cap provisions in the ‘One Big Beautiful Bill Act’

The “One Big Beautiful Bill Act” (H.R. 1), introduced by the House in May 2025, contains notable modifications to the existing State and Local Tax (SALT) deduction cap set to expire at the end of 2025. While the legislative text continues to evolve as the bill advances through Congress, the current proposal includes provisions that would potentially adjust the SALT cap structure rather than fully repealing it. The House-passed bill would raise the current $10,000 cap to $40,000 permanently, phasing down to $10,000 at a rate of 30% beginning at modified adjusted gross income (MAGI) of $250,000 for single filers and $500,000 for joint filers.

However, the Senate’s version of the bill, released on June 16, 2025, maintains the current SALT cap of $10,000. The Senate has admitted that the cap is the subject of continuing negotiations, so the $10,000 amount could change before Congress votes on the final bill.

Tax professionals should note that these changes come amid broader concerns from CPAs regarding SALT-related contingent fee arrangements and other state tax provisions buried within the legislation. Particularly significant is the House’s provision that would curtail states’ ability to impose income tax obligations on out-of-state businesses under P.L. 86-272, representing a substantial shift in interstate commerce taxation. As committee markups continue, the final SALT cap parameters remain subject to negotiation, with regional interests and revenue considerations likely to influence the ultimate compromise.

Equally important is the potential impact on state revenue sources. While the removal of the cap on federal deductions would benefit individuals and small businesses in high-tax states, it could also reduce the effective tax rate and, therefore, state tax collections.

How to stay up to date with changing SALT deduction legislation

Keeping on top of the evolving SALT deduction legislation is essential, particularly if you provide advisory services in SALT tax planning. One of the most reliable ways to stay informed is by following updates from your state tax agency. These agencies are at the forefront of implementing and interpreting changes in tax laws, and they often provide real-time information and clarifications that can be crucial for both individuals and businesses. Most state tax websites have dedicated sections for news and updates, and many offer email alerts or RSS feeds to keep you notified of any changes. By signing up for these alerts, you can ensure that you are always in the loop when it comes to how new legislation might affect your specific state.

In addition to state resources, subscribing to newsletters like Checkpoint newsstand can provide valuable insights and impact analysis. Checkpoint editors are industry experts who break down complex legislative changes and offer detailed explanations of how they might affect different groups.

Finally, it’s crucial to monitor federal legislation, particularly the ‘One Big Beautiful Bill Act’. Federal tax laws have a broad impact, and changes at this level can have ripple effects on state budgets and individual tax liabilities. Keeping an eye on the progress of such bills through Congress, and understanding their potential outcomes, can help you anticipate and plan for any upcoming changes. Websites like Congress.gov or the House and Senate committee pages are excellent resources for tracking legislation.

Additionally, follow a news outlet like Reuters that can provide timely updates and expert analysis. By combining these sources of information, you can stay well-informed and prepared for any shifts in the SALT deduction landscape, ensuring that you are always ready to adapt and feel confident advising clients in tax planning decisions.