As President Trump is gearing up for the culmination of his presidential tenure in 2025, he is slated to decide on a proposal that promises to divert federal funds towards a demographic that forms the vocal support base of Vice President Harris. Within the Republican camp, a few audacious members are calling for the introduction of a financial advantage to an affluent group of educated suburban residents predominantly from Democratic states, a voting group that has largely shunned Trump since his political debut. Ironically, it appears the incumbent President-elect is being drawn into a classic western showdown where he has to reconcile the interests of fiscal prudence advocates and moderates favoring the blue states. Given the razor-thin majority in the House, with a total of 219 members, Trump cannot disregard the minimal group of pro-blue tax relief legislators.
The State and Local Tax (SALT) deduction, as of now, provides a possible deduction of up to $10,000 on state and local tax outlays from federal tax liabilities. An observation worth noting is that the deduction primarily benefits those residing in states that downvoted Trump’s presidential bid. The SALT caucus, a group bipartisan in nature and comprising approximately 30 legislators from states like California, New Jersey, and New York, has been actively advocating for raising this deduction cap for quite some time. The President to be soon, surprisingly, hinted at a potential agreement to cater to these demands.
Previously, a suggestion to double the cap to $20,000 for married taxpayers was voted down by a 195 to 225 vote count with a surprising alliance of 18 staunch Republicans and Democrats uniting to defeat the proposal. It was a rare moment of consensus between the congress’s conservatives and its more liberal members. As a succinct comment during a Rules Committee meeting the previous year by a Freedom Caucus member notes, the increased cap would be beneficial only to ‘some middle-income folks’ in select states.
During his time as the chair of the Budget Committee in 2021, Senator Sanders labeled the complete removal of a SALT cap as ‘beyond unacceptable’ yet expressed readiness for a ‘compromise approach.’ The cost implications and the need for significant expenditure reductions to prevent deficit spending were daunting issues. A large chunk of the benefits would invariably be conferred to the voting sects that were in favor of Ms. Harris.
Avoiding the so-called ‘marriage penalty’ would likely shrink federal revenues by an estimated $159 billion over the forthcoming decade, provided there are no income constraints on the beneficiaries of the deduction. The tentative calculations of this benefit work out to an annual average of an additional $1,400 carried home by households with an income range of $430,000 to $1 million. However, households earning less than $200,000 annually are not expected to feel the benefits.
A proposal to hike the deduction cap to $100,000 for individuals and $200,000 for joint filers could potentially diminish revenues by a whopping $829 billion over the next ten years. In the recent November elections, Ms. Harris won by a noticeable margin of six points among voters who earned more than $200,000, five points among suburban voters, and a magnanimous thirteen points among voters holding college degrees. This national popular vote in the 2024 elections was a significant milestone, marking the first loss for a Democrat candidate over a period of two decades.
Trump, however, commanded a strong presence in the blue states, the key to his popular vote victory which was largely thanks to lower-income minority localities and not suburban districts. Unfortunately, these groups are not expected to see significant advantages from an increased SALT deduction limit.
An analytical study of a amendatory approach, suggests reducing the individual SALT cap to just under $6,000 while maintaining the cap for joint filers at the $12,000 level. The implementation of such a system could potentially yield increased revenues to the tune of more than $1.3 trillion over the next decade.
Certainly, among the array of subsidies, tax breaks, and write-offs under scrutiny, growing the state and local tax deduction would be seen as contrarian from a policy and principle viewpoint. Nevertheless, it might be an imperative step to realise Trump’s ambition of a ‘one big bill’ from Congress. This presents a challenge because the existing cap on the SALT deduction is slated to vanish at the end of the year, potentially taking America back to the days of limitless SALT deductions.
Therefore, logic dictates a possible compromise. This could be termed the ‘Art of the One Big Bill Deal.’ A viable strategy for someone genuinely interested in scaling down state and local taxes would be to run for political offices, like the city council or state senate, and thereby directly reduce state and local taxes.