Ryan Ellis February 24, 2025
I recently co-authored a piece with Stuart Leblang and Amy Elliott from Akin where we explored the current tax situation as it relates to businesses and their ability to deduct state and local tax (SALT) as an ordinary and necessary business expense.
This post today will serve to put some additional perspective out there to amplify that memo, in particular with an eye toward the politics of tax reform in general, and conservative thought opinion in particular.
SALT Before the TCJA
SALT is best seen as three “buckets” of taxpayers: individuals, corporations, and pass-through entities (PTEs).
Prior to the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, the rules on SALT were the same as now for corporations, but very different for individuals and PTEs.
Corporations, then as now, could deduct all SALT of all kinds as an ordinary and necessary business expense.
PTEs deducted all SALT paid directly as a business expense (like property taxes on business assets, extraction taxes, sales taxes paid, etc.) However, since their owners report PTE income on their personal income tax returns, it was left to the owners to deduct SALT owed on PTE profits which are paid on the 1040.
Individuals, including PTE owners, had a theoretically unlimited SALT deduction (for state and local income or sales tax paid, as well as property tax paid) if they itemized. However, in practice there were big limits on the personal SALT deduction–the requirement to itemize deductions (which only one out of every three taxpayers did), the alternative minimum tax (AMT, which eliminated the SALT deduction entirely), and the Pease phaseout of itemized deductions.
What TCJA Changed
As stated above, TCJA didn’t change anything for corporations–fully deductible before, and fully deductible after.
For PTEs, 36 states set up entity-level tax payment structures that allowed S-corporations, partnerships, LLCs, and other entities to pay taxes on business profits at the business level, creating a federal tax deduction for the entity. This then relieved the PTE owner of having to pay personal state tax on the PTE profits. It’s notable that this is not a “workaround,” as it’s often called. It’s simply the entities themselves paying their own taxes on their own profits, and deducting those taxes as a cost of doing business–the same as corporations.
For individuals, there were two major simplifications. First, the standard deduction was doubled (it now stands at $30,000 for a married couple under age 65), relieving 91% of 1040 filers from itemizing. Second, for those 9% of 1040 filers who still itemized, the SALT deduction was capped at $10,000.
Reauthorizing TCJA
Due to reconciliation rules, the non-corporate and some of the corporate provisions of the TCJA sunset at the end of 2025. As a result, Congress is now in the midst of reauthorizing TCJA on either a temporary or a permanent basis.
SALT has been a central driver of the conversation. The Republican House majority is very small, and as a result any handful of Members has outsized leverage. The so-called “SALT Caucus” of Republican members (largely from downstate New York, but with fellow travelers in New Jersey and California) have sensed their opportunity to create a windfall for their constituents on personal SALT.
Despite the fact that virtually all their constituents received a tax cut under TCJA, the widespread perception is that the $10,000 SALT cap hurt blue state taxpayers. With the exception of the occasional outlier case, this is not true: the accompanying tax rate cuts, the doubling of the standard deduction, the AMT’s de facto repeal, and the doubling of the child tax credit almost certainly made up for any SALT deduction lost. In addition, any taxpayer in the AMT and now liberated from it by TCJA effectively went from a SALT deduction of $0 to one of $10,000. A similar effect would be true for those formerly in the Pease phaseout.
Nonetheless, the perceived problem is a moment of leverage for the SALT caucus. Some have demanded frankly outrageous policy changes, including a SALT cap as high as $100,000 for a married couple. Any married couple with that level of SALT to deduct would fit no one’s definition of middle class (or even mass affluent), even in the highest cost of living ZIP codes.
This creates a huge revenue hole in tax reform. Raising the SALT cap from $10,000 to $100,000 for a married couple would decrease tax revenues in a present policy baseline by approximately $1 trillion over a ten year budget window, says the center-left Committee for a Responsible Federal Budget.
Tax writers naturally have turned to business SALT as a way to accommodate these reckless demands. Getting rid of all types of business SALT deductions of business profits alone–PTE entity tax deductibility and corporate state income tax deductibility–would offset $500 billion of personal SALT relief. Add in SALTs like business property tax and extraction taxes, and this number rises to $800 billion.
Changing the Politics
From a conservative tax policy and political perspective, it would be economically foolish, as well as bad tax policy, to raise taxes on businesses in order to cut taxes on individuals with high personal SALT bills. For corporations, this is a tax increase equivalent of raising the corporate income tax rate by 1-2 percentage points (in the case of denial of a deduction for state income taxes paid), or 5-6 percentage points (if other state and local taxes are also denied a federal deduction).
The magnitude of an equivalent tax rate increase would be similar, if not larger, for pass through entities like S-corporations, LLCs, and partnerships.
Higher taxes on business profits in order to pay for lower taxes on personal consumption would almost certainly score out as a net loser for economic growth and job creation in the Tax Foundation model.
Additionally, Congress and its staff (and many in the Trump Administration) are unaware that business profits are paid according to profit allocation rules–a corporation in New York that does 25% of its business in Missouri will allocate 25% of their profits and pay state tax to Missouri. The same holds in reverse. Being physically located in a red state or a blue state doesn’t matter very much when it comes to business SALT, and there is no incentive created to “punish” blue states by denying business SALT deductions. Most Members are completely unaware of any of this.
The SALT Caucus members need to understand also that many of the families they are trying to help won’t even benefit from an outsized personal SALT cap. There will almost certainly be some sort of means testing (either a hard cap, seen last year on a House floor amendment which cut off SALT relief for married couples making $500,000 or more, or a return to an AMT or Pease style phaseout).
A Winning Compromise for Everyone
What’s the way forward? It’s a simple fact that SALT Caucus members have leverage, and they feel they cannot go home empty handed without a win on SALT relief. It’s also true that the demands they are making, and the pay-fors on the business side, would be a net loser for economic growth and job creation, and would make the tax system worse off. It’s not as if business SALT is being used for a large corporate rate cut or other pro-growth tax policy–it would be used for individuals to deduct their personal state income tax bills and property taxes on their house. It would also result in a surge of itemized deduction taxpayers, reversing key simplification gains achieved in TCJA.
Looking back a year ago, the House had trouble finding votes on a bill to extend three expiring TCJA provisions (research expensing, full business expensing, and interest parity), and needed to give the SALT caucus a floor amendment vote to get their support. This floor amendment would have doubled the SALT cap to $20,000 for married couples (ending the marriage penalty in the TCJA cap), but abruptly cut off this additional relief for married couples making more than $500,000 per year.
Something similar needs to be where the SALT Caucus should land. If they need more than this deal, perhaps catching up the original SALT cap to Bidenflation (resulting in a $12,500 cap), and doubling this for married couples (so, $25,000), maybe with a boost for seniors’ empty nester property taxes, and then having this additional relief phase out after a high level of income would be a “peace with honor” solution for all parties involved. The SALT Caucus would get a real win for their voters. The score would be comparatively low. And Congress would not feel the need to use business SALT deductions as a piggybank, or at least not in the most draconian iterations.
In order to change the politics in this direction, the businesses who pay state and local taxes need to educate the SALT caucus about what would happen to companies and jobs in their districts if the swap being driven by northeastern Republicans becomes law.
In addition, red area Republican Members (the overwhelming number of members) need to be told that businesses and jobs in their area are going to be endangered just to help out (in theory) wealthy blue area individuals who probably don’t even vote for Republicans anymore.
The conservative movement needs to reinforce these messages with Congressional tax-writers, leadership, key caucus heads, and drivers of tax reform in the White House and Treasury.
In short, the politics of this SALT conversation has to change or it will endanger the larger prospect of TCJA being made permanent and more pro-growth.
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