Debate: Should States Offer a SALT Cap Workaround?

The 2017 tax overhaul imposed a $10,000 cap on the federal tax deduction for state and local taxes (known as the SALT cap). In response, many states have created pass-through entity taxes (PTETs), which can be mandatory or optional.

The IRS has stated that the entity itself would therefore be entitled to deduct these taxes if they are paid to the state or local jurisdiction, and that PTETs are not included when applying the SALT cap to the individual partner, LLC member or S corporation shareholder. To date, 35 states and one local government have created these PTETs as SALT cap workarounds.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about states using pass-through entity taxes to offer taxpayers a way to “work around” the $10,000 SALT cap.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Byrnes: These types of entity-level taxes are completely legal. Even the IRS has blessed their use. The SALT cap itself unfairly targets Americans who live in high-tax states by creating a cap that isn’t even often relevant to taxpayers who live in lower tax states. That’s patently unfair, and it makes absolute sense that higher tax states should offer a workaround to avoid having these taxpayers flee to low-tax states.