How does the deduction for state and local taxes work?
Taxpayers who itemize deductions on their federal income tax returns can deduct state and local real estate and personal property taxes, as well as either income taxes or general sales taxes. The Tax Cuts and Jobs Act limits the total state and local tax deduction to $10,000.
The state and local tax (SALT) deduction previously was one of the largest federal tax expenditures, with an estimated revenue cost of $100.9 billion in fiscal year 2017. The estimated revenue cost for fiscal year 2019 dropped to $21.2 billion because the Tax Cuts and Jobs Act (TCJA) significantly increased standard deduction amounts (thereby reducing the number of taxpayers who will itemize deductions) and capped the total SALT deduction at $10,000.
State and local taxes have been deductible since the inception of the federal income tax in 1913. Initially, all state and local taxes not directly tied to a benefit were deductible against federal taxable income. In 1964, deductible taxes were limited to state and local property (real and personal 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 sales tax in 1986. It temporarily reinstated the sales 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 tax year 2018, taxpayers cannot deduct more than $10,000 of total state and local taxes. That provision of the law is scheduled to expire after 2025.
Who Claims the SALT Deduction?
Before the TCJA, about 30 percent of tax filers opted to itemize deductions on their federal income tax returns. Virtually all who itemized claimed a deduction for state and local taxes paid. High-income households were more likely than low- or moderate-income households to benefit from the SALT deduction. The amount of state and local taxes paid, the probability that taxpayers itemize deductions, and the reduction in federal income taxes for each dollar of state and local taxes deducted all increase with income.
Sixteen percent of tax filers with income between $20,000 and $50,000 claimed the SALT deduction in 2017, compared to 76 percent for tax filers with income between $100,000 and $200,000 and over 90 percent of tax filers with income above $200,000 (figure 1). Tax filers with income above $100,000 were 18 percent of all tax filers, but accounted for about 78 percent of the total dollar amount of SALT deductions reported. The average claim in this group was of about $22,000.

Although most high-income taxpayers claimed a SALT deduction, the federal individual alternative minimum tax (AMT) limited or eliminated the benefit for many of them. The AMT is a parallel income tax system with fewer exemptions and deductions than the regular income tax as well as a narrower set of tax rates. Taxpayers potentially subject to the AMT must calculate their taxes under both the regular income tax and the AMT and pay the higher amount. Taxpayers cannot claim the SALT deduction when calculating their AMT liability, and under tax law prior to 2018, the disallowance of the deduction was the major 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 disproportionate share of high-income taxpayers and relatively high state and local taxes are more likely to claim the deduction (figure 2). The percentage claiming the deduction ranged from 17 percent in West Virginia to 47 percent in Maryland in 2017. In general, a higher share of taxpayers in Northeast and West states claimed the deduction than in other regions. The average deduction claimed was also higher in those regions.

The Effect of TCJA on the salt Deduction
The TCJA has had a significant effect on the average tax saving from the SALT deduction. Both the percentage of taxpayers claiming the deduction and the average amount claimed fell dramatically in 2018 because of the changes enacted. Figure 3 compares the tax saving from claiming the deduction in 2017 and 2018, before and after the new tax law. The tax benefit is measured as the reduction in tax liability from the deduction, which considers the applicable tax rates in each year, the effects of the alternative minimum tax (which disallows the SALT deduction), and the limit on itemized deductions (the “Pease” limit) that was in place 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 was about one-quarter of what it was in 2017 overall. For taxpayers in the top 1 percent of the income distribution, the tax saving in 2018 was about one-tenth of the tax saving in 2017.
Effects of the Deduction
The SALT deduction provides state and local governments with an indirect federal subsidy by decreasing the net cost of nonfederal taxes for those who pay them. For example, if state income taxes increase by $100 for families in the 37 percent federal income tax bracket claiming the SALT deduction, the net cost to them is $63; that is, state taxes go up by $100, but federal taxes go down by $37. This federal tax expenditure encourages state and local governments to levy higher taxes (and, presumably, provide more services) than they otherwise would. It also encourages those entities to use deductible taxes in place 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 local 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 benefits across income groups and states.
Proponents of the deduction counter that the portion of an individual’s income claimed by state and local taxes is not disposable income, and that taxing it at the federal level is double taxation. Moreover, they argue that federal subsidies are warranted because a significant portion of state and local government spending is for education, health, public welfare, and transportation, all of which benefit the population in other jurisdictions as well. A counterargument, however, is that while federal support may be warranted, the substantial revenues gained by eliminating or limiting the deduction could be used to provide direct support through federal grants and loans.
Updated May 2020
Internal Revenue Service. 2019. “SOI Tax Stats—Historic Table 2.”
———. SOI Tax Stats—Individual Income Tax Returns, Publication 1304. Table 1.2. “All Returns: Adjusted Gross Income, Exemptions, Deductions, and Tax Items, Tax Year 2017”; and Table 2.1. “Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, Tax Year 2017.”
Urban-Brookings Tax Policy Center. “TPC Microsimulation Model, version 0718-1.” Washington, DC: Urban-Brookings Tax Policy Center.
———. Table T18-0161. “Tax Benefit of the Itemized Deduction for State and Local Taxes, Baseline: Current Law, Distribution of Federal Tax Change by Expanded Cash Income Percentile, 2017”; and Table T18-0163. “Tax Benefit of the Itemized Deduction for State and Local Taxes, Baseline: Current Law, Distribution of Federal Tax Change by Expanded Cash Income Percentile, 2018.” Washington, DC: Urban-Brookings Tax Policy Center.
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Dadayan, Lucy, and Noah Zwiefel. 2019. “We Don’t Know If The SALT Cap Is Driving Away Residents Of High-Tax States.” TaxVox (blog). October 8.
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———. 2018. “Estimates of Federal Tax Expenditures for Fiscal Years 2018–2022.” JCX-81-18. Washington, DC: Joint Committee on Taxation.
Sammartino, Frank. 2016. “A Closer Look at the State and Local Tax Deduction.” TaxVox (blog). April 16.
———. 2018. “How New York State Responded to The SALT Deduction Limit.” TaxVox (blog). May 14.
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Urban-Brookings Tax Policy Center. 2020. “Tax Expenditures” (feature). Washington, DC: Urban-Brookings Tax Policy Center.
Zwiefel, Noah. 2019. “Did SALT-y Voters Punish Republicans in 2018?” TaxVox (blog). October 8.