The state and native tax (SALT) deduction has been one among the most important federal tax expenditures, with an estimated revenue cost of $100.9 billion in 2017. The estimated revenue cost for 2018 drops to $43.1 billion because the Tax Cut and Jobs Act (TCJA) significantly increased standard deduction amounts (thereby reducing the amount of taxpayers who will itemize deductions) and capped the entire SALT deduction at $10,000.
 
State and native taxes are deductible since the inception of the federal tax in 1913. Initially, all state and native taxes indirectly tied to a benefit were deductible against federal taxable income. In 1964, deductible taxes were limited to state and native property (real and private property), income, general sales, and motor fuels taxes.


Congress eliminated the deduction for taxes on motor fuels in 1978, and eliminated the deduction for general nuisance tax in 1986. It temporarily reinstated the nuisance tax deduction in 2004, allowing taxpayers to deduct either income taxes or sales taxes but not both. Subsequent legislation made that provision permanent starting in 2015. Starting in 2018, taxpayers cannot deduct quite $10,000 of total state and native taxes. That provision of the law is scheduled to expire after 2025.

 

Who Claims the SALT Deduction?

Less than one-third of tax filers opted to itemize deductions on their federal tax returns in 2016, but virtually all who itemized claimed a deduction for state and native taxes paid. High-income households are more likely than low- or moderate-income households to profit from the SALT deduction. the quantity of state and native taxes paid, the probability that taxpayers itemize deductions, and therefore the reduction in federal income taxes for every dollar of state and native taxes deducted all increase with income.

About 11 percent of tax filers with incomes but $50,000 claimed the SALT deduction in 2016, compared with about 80 percent of tax filers with incomes exceeding $100,000 (figure 1). The latter group, which made up about 17 percent of tax filers, accounted for about 77 percent of the entire dollar amount of SALT deductions reported. the typical claim during this group was of about $21,000.



Although most high-income taxpayers claimed a SALT deduction, the federal individual alternative minimum tax (AMT) limited or eliminated the benefit for several of them. The AMT may be a parallel tax system with fewer exemptions and deductions than the regular tax also as a narrower set of tax rates. Taxpayers potentially subject to the AMT must calculate their taxes under both the regular tax and therefore the AMT and pay the upper amount. Taxpayers cannot claim the SALT deduction when calculating their AMT liability, and under law before 2018, the disallowance of the deduction was the main reason why taxpayers were required to pay the AMT.

Although some taxpayers in every state and DC claim the deduction, taxpayers in states with a disproportional share of high-income taxpayers and comparatively high state and native taxes are more likely to say the deduction (figure 2). the share claiming the deduction ranged from 17 percent in South Dakota and West Virginia to 46 percent in Maryland in 2016. generally, a better percentage of taxpayers in states within the Northeast and therefore the West claimed the deduction than in states in other regions. the typical deduction claimed was also higher in those regions.

 

The Effect of TCJA on the salt Deduction

TCJA will have a big effect on the typical tax saving from the SALT deduction. Both the share of taxpayers claiming the deduction and therefore the average amount claimed will fall dramatically in 2018 due to the changes enacted.  Figure 3 compares the tax saving from claiming the deduction in 2017 and 2018, before and after the new law is in situ. The tax break is measured because the reduction in liabilities from the deduction, which considers the applicable tax rates in annually, the consequences of the choice minimum tax (which disallows the SALT deduction), and therefore the limit on itemized deductions (the “Pease” limit) that was in situ in 2017 but eliminated for 2018 by TCJA.

Measured as a percentage of after-tax income, the tax saving from the SALT deduction in 2018 are going to be about one-quarter of what it had been in 2017 overall. For taxpayers within the top 1 percent of the income distribution, the tax saving in 2018 are going to be about one-tenth of the tax saving in 2017.

 

Effects of the Deduction

The SALT deduction provides state and native governments with an indirect federal subsidy by decreasing internet cost of nonfederal taxes for those that pay them. for instance, if state taxes increase by $100 for families within the 35 percent federal income tax bracket claiming the SALT deduction, internet cost to them is $65; that's, state taxes go up by $100, but federal taxes go down by $35. This federal tax expenditure encourages state and native governments to levy higher taxes (and, presumably, provide more services) than they otherwise would. It also encourages those entities to use deductible taxes in situ of nondeductible taxes (such as selective sales taxes on alcohol, tobacco, and gasoline), fees, and other charges.

Critics of the deduction argue that state and native taxes simply reflect payments for the services those jurisdictions provide and, as such, should be treated no differently than other spending. They also point to the uneven distribution of advantages across income groups and states.

Proponents of the deduction counter that the portion of an individual’s income claimed by state and native taxes isn't income, which taxing it at the federal level is double taxation. Moreover, they argue that federal subsidies are warranted because a big portion of state and native government spending is for education, health, public welfare, and transportation, all of which benefit the population in other jurisdictions also. A counterargument, however, is that while federal support could also be warranted, the substantial revenues gained by eliminating or limiting the deduction might be wont to provide mission through federal grants and loans.

Article Resources:-

https://smartasset.com/taxes/trumps-plan-to-eliminate-the-state-and-local-tax-deduction-explained
https://www.taxcroc.com/medical-expense-deduction/
https://www.brookings.edu/blog/up-front/2019/09/25/a-fixable-mistake-the-tax-cuts-and-jobs-act/