Senate Restores SALT Deductions in Stunning Reversal: A Victory for the Wealthy or a Blow to Fair Tax Policy?

A Stunning Reversal on SALT: What Changed and Why It Matters

In a move that shocked budget watchdogs and policy experts alike, the U.S. Senate has reversed course on one of the most debated provisions in recent tax policy: the state and local tax deduction cap, or SALT.

Over the weekend, lawmakers inserted a surprising revision into the broader tax legislation known as the “One Big Beautiful Bill,” dramatically raising the SALT deduction cap and reviving key tax benefits for wealthy individuals and businesses.

The new provision lifts the SALT deduction cap from $10,000 to $40,000 for households with incomes up to $500,000.

The cap will also be indexed to inflation through 2029, making it more generous over time.

Additionally, the bill revives a workaround for pass-through entities (such as LLCs and partnerships) that allows them to pay state and local taxes at the business level — and thus avoid SALT deduction limits on the individual side.

This policy reversal could have profound implications for the federal deficit, tax equity, and the long-term structure of the U.S. tax code.

With an estimated net cost of $325 billion, the change is drawing praise from lawmakers in high-tax states — and fierce criticism from fiscal conservatives and public policy experts who view it as a regressive giveaway to the wealthy.

Who Benefits from the New SALT Cap?

The main beneficiaries of the Senate’s SALT revision are high-income households in states like New York, California, New Jersey, and Illinois — states where property taxes and income taxes tend to be much higher than the national average.

These residents were most affected by the original $10,000 cap enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), which limited their ability to deduct hefty state and local tax bills from their federal income taxes.

Now, with the cap quadrupled to $40,000 and adjusted for inflation, many wealthy taxpayers will enjoy a significantly lower federal tax bill.

Why High-Tax States Pushed for the Change

While the reversal was not publicly anticipated, it has long been the subject of quiet lobbying from lawmakers in high-tax, primarily Democratic-led states, who argued that the SALT cap unfairly punished their constituents.

Many threatened to withhold support for the broader tax bill unless SALT relief was included.

This cross-party pressure appears to have played a pivotal role in the Senate’s shift.

Both Republican and Democratic Senators from states like New York, California, and Illinois viewed the original cap as politically damaging and economically punitive to their states’ higher earners and donors.

The Backroom Politics: A Trade-Off for Votes

According to Adam Michel, a tax policy expert at the Cato Institute, the sudden change is a “classic case of backroom dealmaking.”

In his view, lawmakers traded sound fiscal policy for political convenience, appeasing their regional constituencies at the expense of national priorities.

“This is how the system works when you need votes to pass a bill that affects the entire tax structure,” Michel said.

“High-tax states get carveouts, and the rest of the country pays the price in the form of growing deficits and a more complicated tax code.”

Deficit Consequences: $325 Billion and Rising

The Senate’s SALT change, combined with proposed tweaks to the Alternative Minimum Tax (AMT), will cost the federal government an estimated $325 billion, according to the Committee for a Responsible Federal Budget (CRFB).

That’s a significant fiscal hit for a country already grappling with long-term debt challenges.

And it raises serious questions about the sustainability of federal tax policy, especially as lawmakers simultaneously pursue sweeping tax cuts elsewhere in the bill.

Understanding the AMT Connection

The AMT was designed to ensure that high-income earners pay at least a minimum amount of tax, regardless of deductions.

Under current law, certain taxpayers must calculate their taxes both under regular rules and AMT rules — and pay whichever is higher.

The Senate’s proposal would extend the AMT exemption and adjust it for inflation, making it less likely that wealthy taxpayers will fall into AMT territory.

It also increases the phaseout levels for high earners.

Critics say that, when combined with the new SALT provisions, these AMT changes would further erode the tax base, allow the wealthy to pay even less, and introduce new complexity into an already intricate tax system.

Is the SALT Deduction Fair?

There’s an ongoing debate about the fairness and utility of the SALT deduction.

Supporters argue that high-income residents in high-tax states are already net contributors to the federal government — meaning they pay more in federal taxes than they receive in services — and that allowing them to deduct state and local taxes makes the tax burden more balanced.

However, critics say the deduction subsidizes wealthier households, gives high-tax states room to raise taxes without backlash, and provides no real benefit to low- or middle-income taxpayers, who typically take the standard deduction instead.

According to Prof. Christopher Berry of the University of Chicago, SALT deductions disproportionately benefit wealthy homeowners, particularly those who own expensive property in urban areas.

He notes that while these residents might be subsidizing their states, the policy goal of encouraging higher local taxes through federal deductions is deeply flawed.

What Alternatives Exist?

The CRFB has suggested that, instead of expanding the SALT deduction, the Senate should eliminate it entirely — not just for individuals, but also for pass-through entities, who have increasingly used state-level tax maneuvers to bypass the cap.

Eliminating the SALT deduction altogether, CRFB argues, could save over $1 trillion, which could then be redirected toward more equitable tax relief — such as expanding the Child Tax Credit, reducing payroll taxes for low-income workers, or simplifying the code to remove loopholes.

Michel echoed this view, emphasizing the need for broad-based reform rather than targeted carveouts: “The real winners here are accountants and tax lawyers.

The losers are ordinary Americans who want a tax system that is fair, simple, and responsible.”

Political Optics and Public Reaction

The Senate’s SALT reversal is likely to fuel public cynicism about the nature of modern tax policy, which often appears to favor the rich and well-connected.

At a time when income inequality remains high and millions of Americans are struggling with rising living costs, handing billions in tax breaks to top earners may prove politically risky.

Already, progressive lawmakers and economic justice advocates are warning that this change sends the wrong message.

They argue that federal tax policy should focus on reducing inequality, not exacerbating it — especially as the government weighs tough choices on funding for healthcare, education, and climate resilience.

Looking Ahead: What’s Next for the SALT Provision?

If the tax bill, including the SALT revisions, passes the Senate, it will head back to the House of Representatives for final negotiations.

With President Trump urging lawmakers to deliver the legislation to his desk by July 4, the clock is ticking.

As debate rages on, the core question remains: Should federal tax policy prioritize regional political deals or nationwide fiscal responsibility?

The answer will shape not only this bill, but the future of the U.S. tax code.

Final Thoughts: A Step Backward for Tax Equity

The Senate’s abrupt reversal on SALT deductions reveals how political pressure, regional interests, and backroom negotiations continue to dominate the American tax debate.

While proponents may frame this as relief for “overburdened taxpayers,” the reality is more sobering: the benefits overwhelmingly accrue to the wealthy, while the costs — in the form of deficits and lost reform opportunities — are borne by all Americans.

If equity, efficiency, and sustainability are to guide tax policy in the coming years, then this reversal may come to be seen as a missed opportunity — and a dangerous precedent.