Could the State and Local Tax (SALT) Deduction for Corporations Become a Bargaining Chip?

By Stuart E. Leblang, Geoffrey K. Verhoff,  Amy S. Elliott, and Ryan Ellis

Individuals from high-tax blue states have been fired up over a tax reform proposal that could limit their ability to deduct nonbusiness state and local income taxes, sales taxes and personal property taxes on their returns. Meanwhile, corporations have always assumed their SALT deductions would be preserved. Could they be in for a surprise? Headlines such as “Corporations to keep tax break lost by millions of Americans” ² will not help sell tax reform.

Tax writers are looking for ways to pay for a reduction in the top corporate income tax rate while appeasing those who want the SALT deduction for individuals preserved—repeal of the SALT deduction for corporations could raise hundreds of billions of dollars. While House Ways and Means Committee Chairman Kevin Brady (R-TX) said October 25 that his chamber intends to preserve the SALT deduction for businesses,  ³ it is one of the pay fors under consideration.

One compromise reportedly would replace the individual SALT deduction with a tax credit of up to 20 percent of a household’s property tax payments with caps. ⁴ Would Republicans pay for such a compromise by repealing the SALT deduction for corporations? One reason why some blue-state Republicans might fight for preservation of the SALT deduction for individuals at the expense of corporations is that a high-tax state for individuals may not be as high for corporations.

Businesses should not discount the possibility that lawmakers may decide to repeal the SALT deduction for corporations, even though the deduction is not considered a tax break by the Joint Committee on Taxation. ⁵ Although Brady said that state and local taxes are a “tiny part of business expenses,”⁶ repeal of the SALT deduction for corporations could nevertheless have a substantial impact on firms with significant business in high corporate income tax states.

Of the 44 states plus the District of Columbia with a traditional corporate income tax, the average top rate is over 7 percent. If the SALT deduction for corporations is repealed, the effective all-in corporate rate would be nearly 1.5 percentage points higher,⁸ which could have a material impact on earnings per share.

Achieving a 20 percent corporate tax rate is non-negotiable, according to Presiden t Donald J. Trump. At the same time, tax writers are contemplating keeping the top rate for high-income individuals at or near 39.6 percent, creating a massive differential between the tax rate imposed on corporate and individual income. Such a large spread is an invitation for abuse. ⁹ 

In addition, repeal of the SALT deduction for corporations could raise revenue to help pay for a rate reduction. According to a rough (likely conservative) 2013 estimate, the corporate SALT deduction causes an annual loss of $25 billion in federal tax revenue.^[10]Experts at the Tax Foundation told us that a score of $25 billion in 2013 translates into about $350 billion over the 2018-2027 budget window (or about $200 billion, if the corporate rate is 20 percent).

[1] According to the Tax Foundation (https://taxfoundation.org/state-corporate-income-tax-rates-brackets-2017/)

[2] https://www.cbsnews.com/news/corporations-to-keep-tax-break-lost-by-millions-of-americans-president-trump-tax-reform/

[3] http://www.politico.com/story/2017/10/25/state-local-tax-deduction-kevin-brady-244149

[4] https://www.wsj.com/articles/gop-house-tax-chief-changes-to-401-k-are-still-on-the-table-1508940867

[5] https://www.jct.gov/publications.html?func=startdown&id=4971

[6] http://thehill.com/policy/finance/357050-gop-chairman-compromise-on-deduction-to-be-announced-before-tax-bill

[7] According to the Tax Foundation (https://taxfoundation.org/state-individual-income-tax-rates-and-brackets-2016/)

[8] Assume a corporation does business in Kansas, where the top corporate income tax rate is 7 percent. It earns $100, $7 of which it pays to Kansas. If it cannot deduct that amount, then it will owe $20 to the U.S. Treasury (as opposed to only $18.60).

[9] Taking into account possible preservation of the 3.8 percent net investment income tax and possible repeal of the SALT deduction for high-income individuals, the top tax rate on individuals in high-tax states could be as much as 47 percent.

[10] http://www.crfb.org/sites/default/files/documents/beyond_tax_expenditures.pdf