Easy on the SALT, Please
In late 2017, when the Tax Cuts & Jobs Act became law, the use of the acronym “SALT” became common. Standing for State and Local Tax, the topic of SALT draws fierce reactions from residents of states with high income taxes. Prior to 2017, higher-income taxpayers in states with high state income tax rates had been able to take all their state taxes as a federal tax deduction. Under the new law, this deduction for state and local income taxes was capped at $10,000. Residents of states without income taxes were less bothered by the change.
When federal income tax was first instituted in the U.S. in 1861 as a mechanism of Civil War funding, SALT was the first and, for a time, the only deduction available. The standard deduction did not appear until 1944. For many high-income earners, and especially non-business owners, SALT became one of the more meaningful federal tax deductions available.
Despite the reduced ability to deduct SALT on federal income taxes since 2017, not all has been grim for those in states with income taxes. After Covid stimulus contributed to state-level budget surpluses, many states have begun to reduce their income tax rates. In 2023, 29 states made tax policy changes across the areas of individual income taxes, sales taxes, payroll taxes, and other taxes.
Among states that reduced income taxes were Arkansas, Indiana, Kentucky, Michigan, Mississippi, and Utah. Even before recent reductions, most of these states had already had near-average or below-average state income tax rates. Absent from the list are the handful of largely coastal states where higher-income taxpayers remain subject to high single-digit or even double-digit state income tax rates.
The disparity has not gone unnoticed. In a world with greater labor fluidity enabled by technology and a less location-bound job market, many taxpayers have opted to relocate to states with temperate climates, both weather and tax-wise. States with low or no state income taxes, including North Carolina, Georgia, Tennessee, and Texas, have experienced steady increases in their populations in recent years.
Here in Georgia, longtime and new residents will be pleased to know that the state income tax rate is decreasing from last year’s top rate of 5.75% to a flat rate of 5.49% for 2024. Over the next five years, provided state revenue and reserve milestones are achieved, Georgia’s income tax rate will decline by 0.10% per year until settling at 4.99%.
Even in the states providing SALT rate cuts, state income taxes can still eat into investors’ after-tax returns, especially with current interest rates now in the 5% to 5.5% range. Compared to bank and money market alternatives, Treasury bonds and bills offer some relief to investors, with their interest being exempt from state income taxes.
Given the 2017 tax law changes and its SALT deduction cap are set to expire at the end of 2025, the state income tax landscape will remain interesting to watch in coming years.