Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, tax filers were generally able to deduct income (or sales, but not both) and property taxes paid to state and local governments. The state and local tax (SALT) deduction was unlimited. The TCJA capped that deduction at an aggregate $10,000 per filer beginning in 2018. Unlike other provisions like the standard deduction, it didn’t double for married couples filing jointly and wasn’t indexed to inflation. The cap was set to expire at the end of 2025.
The SALT deduction, once a fixture of the tax code, primarily benefits high-income filers in states with steep property and income taxes—New York, California, and New Jersey among them. After the TCJA, the number of taxpayers claiming SALT deductions dropped sharply. Coupled with other changes to deductions such as dramatically increased standard deduction and reduced mortgage interest deduction, only about 9% of filers now itemize in a way that allows them to benefit.
The House-passed budget reconciliation bill, H.R. 1—dubbed “The One Big Beautiful Bill”—proposed raising the SALT cap to $40,000 for married couples with Adjusted Gross Income under $500,000, phasing it back down to $10,000 for higher earners. It also sought to prohibit certain pass-through businesses, like hedge funds and law firms, from using a workaround known as Pass-Through Entity Taxes (PTETs) to evade the cap.
The Senate Finance Committee’s budget reconciliation package took a different tack. It made the $10,000 cap permanent and introduced new rules to curb the very workaround the House sought to restrict more selectively. As we have previously written, the Senate wrongly used a current policy baseline—assuming all expiring provisions would be extended—which on paper masks trillions in added deficits from extending the tax cuts. That same assumption also obscures the revenue gain from extending the SALT cap, which was originally a revenue-raiser in the TCJA. But because the Committee made changes to the cap—specifically, adjustments related to PTET—those tweaks are scored.
Since the SALT cap was enacted, 36 states have allowed certain businesses—partnerships and S-corps—to pay state income taxes at the entity level. These payments are federally deductible, effectively letting wealthy business owners sidestep the $10,000 SALT limit.
The Senate proposal closes this loophole while still allowing limited deductions. It lets pass-through business owners deduct PTET payments using a specific formula: any unused portion of their $10,000 SALT cap plus the greater of $40,000 or 50% of their PTET payment. The bill also targets aggressive tax planning by penalizing partnerships that disproportionately allocate PTET deductions to partners in high-tax states. These provisions reflect a growing recognition that the workaround has become a backdoor subsidy for the wealthy.
The Joint Committee on Taxation estimates that the PTET reforms would raise $637 million over the next decade—not a massive sum in a multi-trillion-dollar bill, but a meaningful step toward restoring integrity to the tax code.
The Senate’s approach to PTETs is cleaner and more fiscally responsible than the House version. Instead of carving out special exceptions, it imposes uniform limits and reduces avenues for abuse. That said, the enforcement of these new limits could prove complicated. And by relying on a current policy baseline, the Senate obscures the true cost of extending the SALT cap.
Ultimately, the SALT debate is less about tax fairness than it is about political geography. Blue states push for relief, while red states see a giveaway. But from a taxpayer perspective, the central question remains: do these deductions reflect sound policy or savvy lobbying? The Senate bill doesn’t resolve that tension, but it moves the conversation in a more grounded direction—at least for now. As the Committee’s section-by-section discussion of the legislation noted: “Notwithstanding this SALT cap is the subject of continuing negotiations.”
