Corporate SALT Deduction Limits: A Risky Move for Congress 2   Recently updated !

As Congress explores ways to offset the cost of extending 2017 tax cuts, a proposal to limit corporate state and local tax (C-SALT) deductions has emerged. While it promises to boost federal revenue, this move could have significant negative consequences for the economy and businesses.

Understanding the Proposal and Its Potential Impact

Lawmakers are considering various approaches to limiting C-SALT deductions, which could include corporate income taxes, property taxes, and even sales taxes. The impact varies greatly depending on which taxes are targeted:

• Corporate Income Tax Only: Disallowing deductions for corporate income tax alone could generate approximately $223 billion over 10 years.
• Corporate Income and Property Taxes: Expanding the limit to include property taxes could raise an additional $209 billion.

However, these revenue gains come at a cost. Economic modeling suggests that limiting C-SALT deductions would:

• Increase marginal tax rates on corporate investment.
• Reduce long-term GDP and incomes.
• Lead to job losses.

The Flawed Analogy to Individual SALT Limits

The push for C-SALT limits is partly driven by the perception that it mirrors the individual SALT deduction cap, which primarily affects high-earners in high-tax states. However, this analogy is fundamentally flawed:

• Corporate Income Tax vs. Individual Income Tax: The corporate income tax is a tax on profits, requiring deductions for business expenses, including taxes paid to other jurisdictions.
• Factor Apportionment: Unlike individual SALT, corporate income taxes are often apportioned based on sales, meaning businesses cannot easily avoid high-tax states by relocating.

The Problem of Arbitrary Taxation

Limiting C-SALT deductions could lead to arbitrary taxation, especially considering that:

• State spending primarily benefits individuals, not corporations.
• Apportionment can result in businesses being taxed in states where they have minimal presence.

Pass-Through Businesses and the Issue of Parity

Another argument for C-SALT limits is to create parity with pass-through businesses, which face individual SALT caps. However, true parity could also be achieved by allowing full deductibility for both corporations and pass-throughs.

Conclusion: A Cautious Approach

While limiting C-SALT deductions may seem like a quick fix for revenue generation, it poses significant risks to the economy and could create unfair burdens on businesses. Congress should carefully consider the potential consequences and explore alternative solutions.