WSJ: SALT Cap Costs Federal Govt $20 Billion a Year

Some business owners avoid paying higher taxes by exploiting legal gaps in the $10,000 cap on state and local tax deductions, otherwise known as the SALT cap. This has cost the federal government approximately $20 billion annually.

The tricky part is that these workarounds are available only to business owners who report their profits on their personal tax returns. As per a Wall Street Journal analysis, regular workers, small business owners, and property owners don't have this option and are subject to the cap's rules.

"If you have a SALT cap, it doesn't make any sense to say that the richest workers are basically exempt from it, but everybody else is subject to it," said the Tax Policy Center's Leonard Burman, who was a Treasury Department official during the Clinton administration.

Essentially, these maneuvers benefit owners of businesses like law firms and car dealerships. By using these state-approved strategies, they can lower their federal tax bills. The Tax Policy Center reveals that due to these tactics, the cap is bringing in only around 80% to 85% of its intended revenue. This complicates plans to extend the 2017 tax law, which includes the cap, beyond its current end date in 2025.

The way these workarounds work per the Journal — in the 36 of 41 states with income taxes — "states create elective taxes on those pass-through entities. The business chooses to pay that levy before passing profit through to its owners. That entity-level tax counts as the owners' state tax payment, and it effectively lowers the income the owners report to the federal government."

Though some argue that these workarounds make the tax system fairer, critics say the cap contributes to federal tax losses while hurting the ones making the least.

While some states and businesses support these tactics, there's debate at the federal level about whether they should continue. The Trump administration "blessed" these workarounds, and the Biden administration continued them.

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