Raising the SALT Cap in the OBBB: A Blue State Bailout?

President Donald Trump’s “One, Big, Beautiful Bill” passed the U.S. House of Representatives on May 22, but its long-term implications are far from settled. The bill ties together a wide range of policy issues: reform of SNAP benefits, Medicaid, tax-free tips, tax-free overtime pay, and notably, a raise of the State And Local Tax (SALT) cap — a change that is sparking serious controversy in lower tax red states. 

SALT Cap Hike: Who Gains, Who Pays? 

One of the bill’s most contentious features is the increase in the state and local tax (SALT) deduction cap from that in the current federal tax code.  

SALT deductions, in simple terms, are a way to reduce your federal tax bill by accounting for some of the taxes paid to state and local governments. The SALT deductions can be used for mitigating either income or sales tax. To prevent double taxation, eligible taxpayers can choose to itemize their deductions. These itemized deductions (up to the amount of the deduction cap) are then multiplied by the tax rate to determine the amount of tax a taxpayer can avoid.  

This all can be better understood with an example. Currently, the SALT deduction is capped at $10,000. Here’s how that works in practice: if you paid $7,000 in property taxes and $7,000 in state income taxes (a total of $14,000), only $10,000 of that could be deducted from federal tax liability. If you’re in the 20% federal tax bracket, you would multiply your $10,000 tax deduction by 20%, which would reduce your federal tax bill by $2,000.

The proposed increase in the tax cap would raise the SALT tax deduction cap from $10,000 to $40,000 for households with incomes up to $500,000. This means, using our example, the new amount you could deduct is $14,000 times 20%, which is $2,800. In this example, that is a 40% increase in deductibility, but others will have much greater deduction increases. That’s a big tax break — but mostly benefitting high earners in Democrat-led, high-tax states like California, New Jersey, and New York. 

Supporters argue this could boost incentives for economic growth. On the other hand, critics warn it makes the tax code more regressive, shifting benefits to wealthier households from middle class households while sacrificing federal revenue that could be used to close the gaping federal budget deficit. More on that next.  

It’s a high-cost change: a narrowly-focused $320 billion less collected in taxes than simply extending the current cap. 

Debt Bomb Ahead? 

There’s another problem. The OBBB pairs this SALT relief with popular measures like tax-free tips and overtime, which are politically appealing, but costly. Rep. Thomas Massie (R-KY), one of the gadfly GOP members who voted against the bill, warned that it’s a “debt bomb” in disguise. 

Without offsets, according to some estimates, the SALT cap deduction increases and the Big Beautiful Bill’s increase of the debt ceiling by $5 trillion leaves fiscal conservatives alarmed. As Massie put it, “I’d love to stand here and tell the American people we can cut your taxes, and we can increase spending and everything is going to be just fine. But I can’t do that because I’m here to deliver a dose of reality. This bill dramatically increases deficits…” 

But is Massie correct? The White House Council of Economic Advisors has dubbed the OBBB the “largest tax cut in history” with higher wages and higher take home pay. South Carolina Governor Henry McMaster praised the legislation as “common sense” and “America First policy.” 

Red States Foot the Bill? 

Setting the dueling fiscal notes aside, there is a decided South Carolina angle to the SALT Cap increase debate. Conservative, lower tax states would take a hit with the raised cap. A quick look at IRS data shows who actually claims the most SALT deductions — and it is overwhelmingly taxpayers in blue coastal states. That’s why many conservatives see this section of the bill as a blue state bailout, effectively using red states to bankroll tax relief for the wealthy in urban, Democratic strongholds.  

Palmetto Promise has warned about this before.  

See it for yourself: Blue states on the East Coast and West Coast Generally Have the Highest Average SALT Deductions 

Source: IRS Statistics of Income, 2022; graphic by the Bipartisan Policy Center.

Final Take 

While the One Big Beautiful Bill includes many benefits that advance conservative policy, it also contains a key section that delivers a quiet win for blue-state elites, and at a major cost that is not spread evenly.  

At Palmetto Promise, we must always consider the impact on South Carolina citizens of federal legislation. For South Carolinians and other red-state taxpayers, who enjoy lower property taxes by comparison, the U.S. Senate must stand strong for fiscal responsibility.

If the Senate were to address the bailout problem, the flow of funds from red to blue states due to a SALT Cap increase could be lessened or eliminated and make the OBBB bill more beautiful.