Earlier this month, House Republicans issued a broad package of tax proposals to be made part of the “Big Beautiful Tax Bill” that the Trump administration has promised to enact. For weeks if not months, there has been a lot of chatter about what will happen to the SALT deduction, as many House Republicans from blue states like New York and California have been insistent on reviving the deduction, or at the very least increasing the cap on the deduction (currently set at $10,000) to a much larger number.
Sure enough, the proposal does call for an increase of the SALT cap to $30,000 for married couples, although it eventually phases back down to $10,000 for taxpayers making over $400,000.
But look closer, and there is a more pernicious and problematic proposal calling for the elimination of the deductibility of state pass-through entity taxes (or PTETs) that have been put in place by many states—and blessed by the IRS—as a legitimate workaround to the SALT cap. It also appears that the proposal would only extend to taxpayers that do not qualify for the Qualified Business Income (QBI) deduction, which would only further the divide between the many partnerships and S corporations performing specified services that already are losing out on the QBI deduction because they don't perform the kinds of tax-favored services that the QBI rules focus on. A more complete explanation of the changes is outlined in a summary document issued by the House Ways and Means Committee (see the discussion starting on page 306).
This could be devastating news for many states, far outweighing any potential upside they might see for taxpayers who will benefit from the slight increase to the SALT cap. Indeed, the whole point of these PTET regimes was to curb the downside of the SALT cap to protect taxpayers in states that impose high income taxes. The loss of the PTET benefit is sure to only further hasten the exodus of high-net-worth taxpayers from blue states, causing many New York or California or Illinois residents to vote with their feet and follow their friends and colleagues who have already moved to Florida or Texas or some other state that doesn't impose an income tax.
As if that wasn't enough, the damaging proposals don't stop there. The House proposal also appears to classify most SALT taxes paid by a pass-through entity as taxes that would now be subject to the SALT limitation (whatever that turns out being), which could include sales and use taxes, the UBT, California’s tax on S Corporations, the Texas margin tax, the Ohio CAT, the Washington B&O, etc. All of these taxes are deductible under current law and have been for decades.
This doesn’t sound big or beautiful. It actually sounds quite terrible. On the bright side, with a change like this making state taxes all the more expensive, the residency practice at Hodgson Russ is sure to grow even more!
Disclaimer:
This blog is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this blog should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.
