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The Case for Repealing the Corporate SALT Deduction

by March 13, 2025
March 13, 2025

Adam N. Michel

In the Tax Cuts and Jobs Act of 2017, Congress placed a $10,000 limit on the amount of state and local taxes (SALT), such as income and property taxes, that any individual or family can deduct from their federal taxable income. The 2017 limits did not apply to business entity-level taxes, such as the corporate income tax.

As Congress assembles the tax package this year to extend and improve the 2017 tax cuts, it will need to include new reforms that raise revenue to offset the proposed tax cuts. One reform being considered is limiting corporate state and local tax (C‑SALT) deductions by extending the limits placed on individuals to businesses.

While most analysts agree that the $10,000 limit on the personal SALT deduction is good fiscal policy, there has been some recent debate over whether extending similar limits to corporations is warranted.

To improve equal treatment under federal tax law, the correct answer is to eliminate all business entity-level and individual deductions for income and property taxes. Businesses should be able to deduct sales taxes that are legally imposed on the seller, if included in gross income, and government fees for services that compete with private alternatives. For a discussion of wage taxes, see Alan Viard’s “Rethinking the State and Local Business Tax Deduction.” As with any revenue-raising reform, new limits on SALT should be paired with pro-growth tax cuts, such as full expensing and rate reductions.

The following analysis is necessarily wonky to acknowledge the numerous theoretical ambiguities and real-world frictions at play in this tax debate. Proceed at your own risk.

The Case for Equal Treatment

The overriding consideration is that many SALT deductions for individuals and businesses result in preferential treatment depending on location and distort incentives for local policymakers. Because higher-tax locations receive bigger federal tax deductions, this creates a cross-subsidy from low-tax places to high-tax places, biasing state policy toward bigger government.

The individual limit on SALT also nominally applies to the more than 90 percent of businesses that pass their income through to their owners’ individual income tax returns. Due to permissive federal regulations and aggressive state workaround laws, the SALT limit is unevenly enforced and greatly complicates state tax systems. However, without the state workarounds, pass-through businesses (facing the SALT limit) and C corporations (which do not face a limit) would face unequal treatment under federal tax law. Prohibiting state workarounds and applying the same individual SALT limits to all business types and entity-level taxes would enhance horizontal equity, which means treating similarly situated firms similarly.

Given the individual-level deduction, policymakers should pursue reforms that create economically similar treatment. As Kyle Pomerleau points out, if there were no corporate entity-level tax and instead only a tax on business profits when they are distributed as dividends, the individual SALT cap would apply. Thus, the effective tax rate on corporate profits would be roughly equal whether imposed at the individual or entity level. State-level corporate income tax apportionment decisions don’t change this analysis. C‑SALT is not analytically different from personal SALT—limits on one should imply limits on the other.

Finally, policymakers should want to tax all consumption equally. Chris Edwards explains in his Cato report on tax expenditures that there is some theoretical ambiguity about the appropriate, neutral treatment of SALT. Viard also engages with these ambiguities using a slightly different framework.

In one view, SALT pays for government services, which accrue to individuals as untaxed consumption. Denying a deduction for SALT payments is one way of taxing the government transfers and equalizing the tax treatment of government services and privately provided alternatives. However, if state and local spending is equivalent to investment, it deserves a deduction for equal treatment.

For businesses, the story could be more complicated. Some argue that business taxes are a cost of doing business and thus should be fully deductible, like wages and investments. But no deduction is warranted if income and property taxes pay for untaxed transfers. More than 90 percent of state and local spending is direct untaxed transfers and state consumption, so denying the deduction makes sense.

SALT and Tax Reform

The expiration of the 2017 tax cuts at the end of this year presents Congress with a seemingly unlimited number of complex policy tradeoffs. One of the best microcosms of this difficulty is the SALT deduction.

In 2017, the $10,000 individual and pass-through business SALT cap and other limits on itemized deductions offset about 60 percent of the individual tax cuts, raising $668 billion over 10 years. Extending the tax cuts this year will be next to impossible without maintaining some limits on SALT.

Limits on C‑SALT can play a similar role this time around to ensure the most pro-growth tax cuts can be made permanent. Fully eliminating C‑SALT could raise between $432 billion and $793 billion over 10 years. Closing pass-through workarounds could raise another $200 billion. The new revenue is a tax increase that would result in negative economic effects in isolation. This is true of most tax base reforms that raise revenue. However, genuine tax reform pairs revenue-raising tax base improvements, such as SALT limits, with other pro-growth changes, such as permanent full expensing, faster write-offs for investment in structures, and further reductions in the corporate income tax rate.

The corporate income tax is a highly imperfect revenue source and should ultimately be repealed entirely. However, while it exists, policymakers should work to reduce its economic and political distortions. Eliminating the SALT deduction as part of a broader tax reform can meet those goals.

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