Cap the Business State and Local Tax Deduction

The Tax Cuts and Jobs Act of 2017 introduced a limitation on the individual itemized deduction for state and local taxes (SALT) paid. The limitation applies to all individual taxpayers, including owners of pass-through businesses; however, business-level taxes paid still remain deductible. Businesses pay several different state and local taxes, including income, property, sales, and excise taxes. The deduction for business taxes paid under current law reduces effective statutory tax rates on business income, and has created an opportunity for pass-through entity tax (PTET) workarounds for taxpayers to avoid the individual-level SALT cap.

This option disallows business-level deductions for income and property taxes paid by corporate and non-corporate businesses and ends the current PTET workaround regime. Disallowing business deductions for state and local income and property taxes paid would increase marginal tax rates on business income and reduce incentives to invest, lowering long-run economic output.

On a conventional basis, this option would decrease the primary deficit by $934.9 billion over the budget window. Long-run GDP would fall by 1.3 percent, and long-run GNP by 1.0 percent. On a dynamic basis, the primary deficit would decrease by $188.0 billion from 2027 through 2036, $746.9 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 178.1 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.3 percent. The top quintile of taxpayers would experience a 0.4 percent decrease, while the bottom quintile would experience a 0.3 percent decrease. On a long-run dynamic basis, taxpayers would see a 1.3 percent decrease on average.