The House Ways & Means Committee has produced “The One, Big, Beautiful Bill” (OBBB) tax legislation as part of the reconciliation process. It primarily extends the 2017 Tax Cuts and Jobs Act (TCJA), which was highly pro-growth.
In addition to moving TCJA forward, the OBBB makes further modifications to the tax code. The most heavily debated of these relates to the maximum household deduction for state and local taxes (SALT).
One of the largest tax reforms included in TCJA was the $10,000 limit on SALT. Since the SALT deduction is an indirect subsidy for state and local governments, Congress decided to rein in the cost and use the savings to lower tax rates for families and businesses.
Legislators from high-tax states are calling for a dramatic SALT deduction increase. This would be an expensive misstep.
SALT Deduction Encourages Government (Not Economic) Growth
Americans have a well-grounded hatred of taxes, and proposals for tax cuts and “tax relief” usually find a receptive audience. However, this does not mean all changes using that framing are worthwhile.
For example, most federal tax revenue comes from levies on wages and investment. This serves to discourage work and investment, since it reduces the reward of labor for a worker and reduces the expected rate of return for investors. Cutting these types of taxes encourages work and investment, fostering stronger economic growth.
In contrast, the federal SALT deduction acts as a discount for taxes imposed by state and local governments. When a state or locality increases property, sales, or income taxes, the federal government picks up part of the tab. This reduces the political cost, making state and local officials more comfortable with tax-and-spend budgeting.
New York is an example of the tax-and-spend approach. Despite years of sluggish job numbers and residents fleeing to low-tax states, New York continues to produce budgets that ramp up spending. Its 2026 budget is more than 10% larger than the 2024 budget, outpacing inflation and economic growth. A larger SALT deduction would encourage even more irresponsible behavior from Albany.
While many Americans suffer from heavy state and local tax burdens, the federal SALT deduction does nothing to fix the underlying problem of excessive spending. Worse, it imposes part of the burden on those living in responsible, low-tax areas.
SALT Deduction Increase Does Little for the “Middle Class” At High Cost
Among the changes in TCJA was an increase to the standard deduction. This reduced the number of households claiming itemized deductions such as SALT. Of middle-class households that still itemize, an even smaller number face a SALT bill of more than $10,000 per year.
Households that continue to itemize and pay over $10,000 of SALT are now overwhelmingly upper income. Thus, while families across the income scale would face a higher tax burden if Congress allows TCJA to expire, increasing the SALT deduction overwhelmingly benefits high-income households.
Outside analysts show that potential changes to increase the SALT deduction would reduce revenue by hundreds of billions of dollars.
Putting the Economy Ahead of Tax-and-Spend States
The House Budget Committee placed a limit on how much the final reconciliation package can adjust federal revenue. Devoting a portion of that limit towards increasing the SALT deduction would mean having less room for pro-growth reforms.
A notable example is deductions for important businesses investments. Ideally, Congress will make these TCJA policies permanent, creating certainty and encouraging job- and wage-enhancing investments. If these provisions are set to expire in a few years, businesses could start reducing investments – even before the expiration.
Congress should do what is best for all Americans, including those in high-tax states. Rather than increasing the SALT deduction, the final reconciliation bill should focus on giving workers and businesses the most pro-growth tax code possible.
