A provision in President Donald Trump's tax law, enacted in July, has surprisingly led to significant tax savings for residents in Democratic-led areas, particularly New York, New Jersey, and California. This legislation raised the state and local tax (SALT) deduction cap from $10,000 to $40,000. This increase was a result of a political compromise with congressional leaders and some Republicans from swing districts in the New York City area and southern California.
This change has been particularly beneficial for taxpayers in high cost-of-living areas, with many in states like Connecticut, New York, New Jersey, California, and Massachusetts having average SALT deductions close to $10,000 before the increase, indicating they were hitting the previous cap. Raising the cap allows these taxpayers to deduct a larger portion of their state and local taxes, which include income and property taxes. For instance, Westchester County in New York, known for its high property tax bills, sees residents benefiting significantly.
However, the increased cap does have implications for federal revenue, as raising deductions ultimately reduces the amount the federal government collects. The higher SALT cap is projected to increase the national debt by over $142 billion over 10 years, according to the Joint Committee on Taxation, and the Tax Foundation estimates it could cost about $320 billion compared to extending the previous cap. In 2022, New York state and local governments spent $15,368 per person and levied $12,751 in tax per person, demonstrating the substantial tax burdens in these areas.
While the expanded cap provides relief, some high-income households in areas like the New York tri-state area whose non-business related SALT liabilities exceed $40,000 (subject to phaseout) may still feel a "pinch." This is because pass-through entity (PTE) workaround elections, now available in 36 states including New York, New Jersey, and Connecticut, allow businesses to deduct owners' state income taxes at the entity level, effectively bypassing the personal cap for business-related income. This means the primary beneficiaries of the personal $40,000 cap are those with high property taxes or non-business related income that pushes them over the previous $10,000 limit but still within the new $40,000 limit, especially those without significant PTE income.
California is also exploring creative tax policies, such as reclassifying vehicle sales taxes as licensing fees, which would be treated as property taxes for federal purposes. This aims to allow taxpayers to take greater advantage of the higher federal SALT deduction cap. While pitched as middle-class relief, analysts suggest this specific workaround would mainly benefit higher-income Californians, specifically those earning well into six figures but not ultra-wealthy, who have enough "room" under the $40,000 cap to make the additional deduction meaningful. For example, a single filer earning $225,000 with $36,000 in combined state income and property tax could save over $1,500 by deducting a $5,400 vehicle tax, while lower earners would see minimal benefits.
