In February, Arnold Ventures released its report, “Achieving Fiscally Responsible Tax Reform.” As part of the report, we proposed capping the state and local tax (SALT) deduction for businesses, just as it is capped at $10,000 for individuals, and provided estimates that doing so could raise $610 billion or more over ten years. Most of that revenue derives from limiting deductions for local property taxes, with a smaller portion derived from limiting state income taxes.
As Congress, the business community, and outside experts have worked through this idea, we have come to learn some important lessons that lead us to conclude that capping the deduction for state and local taxes on business income and using the revenue to extend pro-growth business tax relief represents a policy trade-off that is both pro-growth and fiscally responsible – even if the cap does not apply to property taxes paid by businesses.
Businesses Get a SALT Deduction Windfall Compared to Individual Taxpayers
Under current law, individual taxpayers are limited to deducting just $10,000 in SALT, while corporations continue to enjoy unlimited deductions. This disparity led to an outcry from owners of pass-through businesses, such as S‑corporations and LLCs, who pay taxes through the individual tax code. In response, 36 states and the District of Columbia have devised complex “SALT workarounds,” allowing pass-through entities to effectively circumvent the federal SALT cap.
These workarounds, however, do not just benefit active businesses. High-net-worth individuals, by setting up family offices to manage their wealth, are able to exploit state SALT workaround laws, undermining federal tax equity and efficiency. While moderately affluent households that manage their own investments or use an outside financial advisor are subject to a $10,000 SALT cap, ultra-high-net-worth individuals achieve an unlimited SALT deduction by treating their family offices as “businesses.”
Capping the SALT Deduction for All Businesses Will Create Tax Parity
Addressing business SALT (B‑SALT) deductions for state income taxes could significantly enhance the fairness and simplicity of the tax code. Workaround loopholes complicate state tax codes and create uneven playing fields that benefit select taxpayers in some states at the expense of broader equity. By capping B‑SALT deductions for state income taxes, Congress can address these disparities directly, simplifying the tax code while creating a more level playing field between individual and business taxpayers, and between different business and investment structures.
Capping Income Taxes Has a Smaller Economic Impact Than Capping Property Taxes
The property tax, tied directly to physical capital and infrastructure, represents a cost of business inputs used to generate income and directly affects business investment decisions. Income taxes, on the other hand, are calculated and paid after profits are determined. Because property taxes affect the routine return on physical capital, the Tax Foundation found that capping property taxes “has a greater economic impact” than capping income taxes.
Capping the B‑SALT Deduction for Income Taxes is a Generous Revenue Offset
The revenue associated with capping B‑SALT is considerable. According to the Tax Foundation, limiting the deduction for state corporate income taxes alone could raise approximately $223 billion over ten years. Ending state workarounds for noncorporate business and investment entities would yield an additional $226 billion, bringing total potential revenue to $450 billion across ten years. This substantial revenue could finance critical pro-growth policies without further exacerbating the national debt.
The B‑SALT Cap on State Income Taxes Can Fund Needed Pro-Growth Tax Reforms
Much of the revenue generated by capping B‑SALT deductions for state income taxes could be directed toward pro-growth reforms, particularly enhancing provisions such as bonus depreciation and full expensing of research and development (R&D) expenditures. These provisions are among the most powerful for stimulating investment, driving innovation, and increasing productivity. The Tax Foundation estimates that permanently extending R&D expensing, 100% bonus depreciation, and changes to the business interest deduction could boost GDP by approximately 0.7 percent, expand capital stock by 1.3 percent, and create around 179,000 new jobs.
Capping B‑SALT is About Economic Growth and Fiscal Responsibility
Extending the SALT cap to all business and investment entities aligns well with fundamental tax reform principles of neutrality, simplicity, and economic efficiency. Capping B‑SALT deductions for state income taxes and using the revenue to offset growth-enhancing investment provisions presents a pragmatic solution, enhancing economic growth and job creation without adding to the debt. By strategically reforming B‑SALT deductions and reinvesting the revenue into pro-growth business tax relief, Congress can ensure a more balanced, efficient, and fiscally sustainable tax system.
