SALT Parity State of Play
Lots to report on the SALT Parity front. As you can see from our map, the number of states adopting our PTET elections is up to 38, with only four to go. It’s not all good news, however, as some states are considering backsliding on the policy while others are using the PTET regime to offset significant new taxes. Here’s the rundown.
Back in March we flagged an emerging threat to New York’s Parity regime, noting that their budget proposals included PTET “haircuts” that would siphon money away from New York’s Main Street businesses and into state and city government coffers.
The proposal included cutting the state PTET credit to 90 cents on the dollar, while Mayor Mamdani went further, requesting the state reduce the city credit to 75 cents. Fortunately, Governor Hochul opposed the proposal and, more recently, announced both haircuts were left on the cutting room floor. The existing PTET regimes in New York State and New York City remain intact.
So a good result, but not exactly a clean bill of health. The episode revealed the dark underbelly of SALT Parity — when states face a budget crunch, they often view our PTET credits as an opaque means of raising revenue.
Maine is a good example. The state enacted our SALT Parity reform just this spring, but the new PTET includes a 10 percent haircut diverting funds away from businesses and into the state’s coffers. Also included was a 2 percent income surtax on individuals above $1 million, a so-called “millionaire tax.” Taxpayers subject to the new tax will pay an extra $20,000 in state taxes for every million they earn, while splitting the new PTET credit $6,660/$740 with the state. Not a great outcome for Main Street. That’s a net tax hike for taxpayers subject to the surtax, and a smaller than expected tax benefit for those below it.
Washington State, meanwhile, is on its own journey. The state recently enacted its first-ever personal income tax — a 9.9 percent tax (seventh highest in the country) on income exceeding $1 million. The state had historically rejected imposing an income tax, with voters adopting an initiative prohibiting one as recently as 2024. That initiative means the new tax faces an inevitable legal challenge, but the Washington State Supreme Court is highly flexible and likely to embrace the new tax anyway. Bottom line, as with Maine, the enactment of the new PTET regime in Washington is a one step forward, two steps back proposition.
On the brighter side, several states have moved to extend and/or improve their PTET regimes. California extended its SALT Parity program through 2030 as part of last year’s budget and added flexibilities around election timing and payments to reduce administrative burdens. Elsewhere, Minnesota and Oregon passed extensions of their programs through 2027, while Illinois took the strongest step by making its PTET law permanent late last year. It’s a welcome contrast to the erosion we’re seeing elsewhere, and a reminder that SALT Parity shouldn’t be treated like a piggy bank.
Finally, we will ask again — what are North Dakota, Pennsylvania, Delaware and Vermont waiting for? As we’ve said from the beginning, SALT Parity is a rare win-win for states. It costs the States nothing, while their Main Street businesses get a restored business deduction. For lawmakers in those states, they are leaving billions in tax savings on the table.
SALT Parity is one of the more tangible policy wins Main Street has achieved in recent years, and we oppose efforts to quietly erode it through haircuts or other backdoor tax hikes. We’ll keep tracking (and fighting) these threats even as we vigorously wave the SALT Parity flag.
A Double Tax Trap
When tax writers approach the next round of tax reform, number one on their list should be to eliminate double taxation. Nothing contributes more to economic distortions than taxing the same income two (or more) times. Embracing a “single tax system,” on the other hand, would eliminate those distortions and encourage more investment and job creation.
The brouhaha over the new Section 68 haircut on itemized deductions suggests we’ve got a long way to go on that front. Here’s how CNBC describes the problem:
The deduction cap is imposed on trusts and estates, the experts said, which was unexpected. Even if a trust gave all its income to its beneficiaries, it would have to pay taxes on a portion of that income, according to their interpretation of the document.
While the consequences are steeper for trusts and estates of the ultra-wealthy, trusts with as little as $16,000 in income would also be subject to additional taxes, the experts said.
“There is potentially an element of double taxation,” said Dan Griffith, director of wealth strategy at Huntington Bank. “This is something that is going to affect somebody with a $400,000 special-needs trust. It’s not just going to be something that $100 million dynasty trusts suffer with.”
Griffith said he is especially concerned about trusts that are obligated to distribute all their income. Trusts will either have to sell assets to pay the taxes, sacrificing future investment returns, or reduce their distributions to beneficiaries, he said.
The Joint Committee on Taxation’s (JCT) Blue Book raised the profile of this issue by suggesting that the double tax outlined above was both the correct interpretation of the new statute and reflective of congressional intent. But is it, and was it? No, not.
What’s Affected
Contrary to the Blue Book, how the Section 68 haircut applies to deductions unique to trusts and estates is entirely unclear. As noted in a Tax Notes article Monday:
Does section 68 apply to special fiduciary deductions that only apply to trusts and estates — not individuals? Many fiduciary deductions, including those under sections 67(e), 642(b), 642(c), 651, and 661, function as mechanisms for allocating income to beneficiaries or charities. Applying section 68 could undermine subchapter J’s quasi-conduit principles and risk double taxation at the fiduciary and beneficiary levels.
Why is this important? The CNBC story above includes a nice illustration. So does the Tax Notes article:
Assume the DEF Trust received ordinary interest income of $1 million, had no expenses, and distributed $1 million to a beneficiary. The DEF Trust should have a distribution deduction of $1 million under sections 651 or 661. However, if the 2/37ths limitation under section 68 applies to fiduciary distribution deductions, then the DEF Trust will be subject to tax on $53,189.19 [($1 million – $16,000) * 2/37 = $53,189.19]. The beneficiary would still be subject to tax on the entire $1 million distribution of ordinary income, and that beneficiary’s itemized deductions would also be limited by 2/37ths under section 68. In effect, the application of section 68 to fiduciary distribution deductions would create a double tax of the same income to both the trust and the beneficiary, which would contradict the legislative intent for taxing trusts and estates under subchapter J.
Applying new Section 68 to all allowable trust and estate deductions results in a 2-percentage point increase in their effective tax rate, starting with income as low as $16,000. That is because all the trust’s taxable distributions to beneficiaries would be subject to tax, while 5.4% of the same income would be subject to tax at the trust or estate level. Income from active S corporations is at risk here, too. Consider how this would function with an estate (or a 645 trust) holding S corporation shares. This result could diminish the value of the 199A deduction by more than a quarter.
Clear Statutes, Opaque Intent
The key phrase in the Tax Notes citation above, however, is if the limitation applies to fiduciary distribution deductions. The Blue Book issued last month concluded that section 68 applies to estates and trusts in footnote 102 on page 26. But the Blue Book is not the definitive authority, nor is it legislative history — rather it is post-enactment secondary authority. Regarding the legislative history, the Tax Notes piece says this:
Neither the statutory text nor the legislative history directly addresses the application of the new limitation to preferential-rate income or to deductions unique to trusts and estates. The current statutory framework risks unintended results — such as double taxation and erosion of long-standing quasi-conduit principles — and requires targeted legislative or regulatory clarification.
Our S-Corp advisors agree. New Section 68(a) says “In the case of an individual, the amount of itemized deductions otherwise allowable for the taxable year (determined without regard to this section) shall be reduced….” The first sentence of section 642(b) however, says “The taxable income of an estate or trust shall be computed in the same manner as in the case of an individual, except as otherwise provided in this part.” [Italics added.]
The italicized language in these two statutes is key, as the disputed deductions are unique to trusts and estates, and are provided in Part I of Subchapter J of the Internal Revenue Code (“Estates, trusts, and beneficiaries”). They clearly fit within the “except as otherwise provided in this part” language. Furthermore, S-Corp is not aware of any contemporaneous expression of intent – that is, actual legislative history — that suggests legislators intended to tax more than 100 percent of trust or estate income in any circumstances.
Treasury Should Act
The combination of clear statutory text and opaque intent should be sufficient for Treasury to craft language that limits the scope of Section 68 to itemized deductions that are available to individuals only and exclude deductions that are merely income allocation provisions applicable to estates and trusts.
As the language of Reg. §1.67-4(a)(1) states: “An estate or trust…must compute its adjusted gross income in the same manner as an individual, except that the following deductions…are allowed in arriving at adjusted gross income:…(B) Deductions allowable under…sections 651 and 661 (relating to distributions)”. This is especially important as the function of sections 651 and 661 is simply to allocate income between the estate or trust and its beneficiaries, rather than to give a tax benefit, such as for a charitable contribution.
The Tax Notes author agrees. His options to clarify the provision and avoid double taxation include:
- “Congress could amend section 68to clarify that it applies only to deductions computed “in the same manner as in the case of an individual.” This would exclude fiduciary-specific deductions under sections 67(e), 642(b), 642(c), 651, and 661, preserving the quasi-conduit structure of trusts and estates.”
- “[I]f section 68is intended to apply to charitable deductions under section 642(c) but not to the unique administrative expenses of trusts and estates or to the deductions allowed under sections 642(b), 651, and 661, Treasury could issue regulations under section 68 — similar to reg. section 1.67-4(a)(1)(ii) — clarifying that those deductions are not itemized deductions within the meaning of section 63(d).”
This position and recommendations are consistent with comments from the AICPA, the NYSBA Tax Section, and ACTEC.
You can add S-Corp to that list. The JCT’s position on new Section 68 is unsupported by the statute, the tax history of trusts and estates, and the understanding of those who voted on last year’s tax bill. It is also contrary to all other secondary authorities. The bottom line is Congress and the Treasury should be spending their time eliminating harmful double taxation, not stumbling their way into new instances of it.
Bad Data
Jack Salmon, Research Fellow at the Mercatus Center and author of the Substack The Unseen and The Unsaid (and recent podcast guest!) has a great piece out this week that tears down the myth popular among tax hike advocates these days.
The writeup was inspired by a post on X from Tom Steyer, billionaire and California gubernatorial candidate, making a familiar argument: top tax rates were sky-high in the postwar decades, and all that revenue built the middle class.
This claim surfaces reliably in every tax debate, deployed to suggest that returning to 70 or 90 percent rates would solve all our fiscal woes. Salmon takes that logic apart:
In 1952, the federal government raised 18 percent of GDP in tax revenues. This compares with federal revenues of 17 percent of GDP today. So, relative to today, “all that money” amounted to only about 1 percent of GDP in federal revenue, roughly $300 billion in today’s economy, or about 2 weeks of current government spending.
On the spending side, Steyer credits those high-rate decades with building roads, funding health care, and investing in education, but the numbers don’t line up.
…Adjusting for inflation, in 1979, the federal government spent $222 billion on all health care programs. Compare this to the FY 2025 budget which allocated $1.66 trillion to Medicare and Medicaid combined, or more than 7-times the amount in 1979.
…For transportation and education spending in 1979, the federal government spent roughly half as much on both as it does today, adjusting for inflation. Even if we adjust for population growth, the federal government still spends significantly more today on transportation, education, and especially on health care.
In other words, the spending buildup happened after rates fell, not during the era of confiscatory rates.
But the most revealing data in Salmon’s piece concerns effective rates, what the wealthy actually paid versus what the statute said:
In 1952 when the top income tax rates were 92 percent, the top 1 percent paid an effective rate of less than 17 percent, while the top 0.1 percent paid a 21 percent effective income tax rate. Today, both the top 1 percent and 0.1 percent pay effective income tax rates above 26 percent. So, with a top rate of 37 percent, the wealthiest Americans pay higher effective income tax rates than they did with a top rate of 92 percent.
The reason is straightforward. The mid-century tax code offered a menu of alternatives. Wages faced a 92 percent rate, corporate income was over 50 percent, and capital gains 25 percent. Naturally, taxpayers took their income in whichever form was cheapest.
We’ve covered this dynamic before (see here and here). Taxpayers in that era simply routed their income through corporations and capital gains to avoid the top brackets entirely, assisted by a complex web of deductions and workarounds that made the avoidance more tolerable. This CBO heatmap below makes the pattern visible:
The dark upper bands (rates above 50 percent) cover only a thin sliver at the very top of the chart before largely disappearing as rates came down. The color that dominates across the whole period is yellow, the lower brackets. The exception is the inflationary 1970s, when bracket creep pushed ordinary workers up the rate schedule. That is when the upper bands briefly widened. The top rates raised revenue in that decade by taxing the middle class, not the wealthy.
Taxpayers revolted. The inflation-fueled bracket creep of the 1970s sparked the Reagan Revolution, drove rates down, and produced indexed brackets. The result was a more friendly, progressive tax code – rates came down for the middle-class and the wealthy shouldered a higher percentage of the tax burden.
Ironically, today’s leading advocates for higher wealth taxes often acknowledge this dynamic, albeit inadvertently. In an NYT op-ed backing California’s proposed billionaire wealth tax, Berkeley economists Emmanuel Saez and Gabriel Zucman repeatedly describe how wealthy taxpayers restructure income, relocate, and otherwise respond to tax incentives. The piece spends multiple sections rebutting concerns about billionaires leaving California, while simultaneously documenting how many have already begun “making moves to leave the state.”
That’s the entire point. The history of the 90 percent era was never one of the wealthy dutifully paying confiscatory rates. It was one of avoidance and behavioral response. Salmon’s piece strips away the mythology and focuses not on headline rates, but on what taxpayers actually paid.
Billionaire Brake Check
Jeff Bezos sat down with CNBC’s Andrew Ross Sorkin this week and spent the better part of an hour challenging the political dogma that taxing the rich is the answer to all our country’s economic problems. It’s worth watching, if only to see Sorkin, who specializes in interrupting his guests, barely get a word in during the entire interview.
Right out of the gate, Bezos addressed the flawed wealth inequality narrative underpinning much of today’s tax-hike movement:
What’s happening here is politicians are using… this age old technique of, you know, picking a villain and pointing fingers. But the problem is that doesn’t solve anything. And so like, if you want to help the group of people who are struggling, you have to figure out real root causes and solutions. And that takes skill.
…If you really are being honest about it, we don’t have a revenue problem in this country. We already have the most progressive tax system in the world. The top 1 percent of taxpayers pay 40 percent of all the tax revenue. The bottom half pay only 3 percent… We actually have a spending problem and that’s a skills issue.
Bezos used the New York City school system as a prime example of the challenge:
They spend $44,000 per student. That’s 30 percent more per student than other big cities like Chicago, LA, and Boston. And it’s three times more than Miami and Houston. And by the way, New York City doesn’t get better outcomes. If we ran Amazon the way New York City runs their school system, your packages would take six weeks to arrive. We’d have to charge you a $100 delivery fee. And then when the package did finally arrive, it’d have the wrong item in it anyway.
As we’ve pointed out repeatedly, federal tax revenues are currently above historic levels and the tax code is more progressive (the rich pay more) than at any time in the last 60 years. Yet some still want more – always more. At what point can we admit we have a spending problem?
Bezos also addressed the so-called “buy, borrow, die” strategy that has become a fixation of tax hike proponents in recent years:
As far as I know, there is no truth to this ‘buy, borrow, die’ thing. I don’t even know where this comes from. I’m selling Amazon stock routinely, and that’s how I fund Blue Origin and a bunch of other things. So every time I sell I pay taxes on that…I’m a little skeptical that’s a true loophole. But if it is we can fix it. But when you fix that loophole, it’s not going to help that nurse in Queens. It’s not going to help her at all.
As we wrote previously, is any tax avoidance plan in which the taxpayer has to die to benefit really that great?
One of the comments that got the most attention was Bezos’ call for eliminating taxes on lower- and middle-income taxpayers:
A nurse in Queens who makes $75,000 a year pays more than $12,000 a year in taxes. Does that really make sense? So, people talk about making the tax system more progressive. How about we start by having the nurse in Queens not pay taxes? That’s $1,000 a month that could help with rent or groceries or anything. And by the way, do you know what that all adds up to? The bottom half of income earners in this country pay only 3 percent of the taxes. It’s only 3 percent. We can find 3 percent. It’s a small amount of money for the government.
Couple problems here. One, we’ve already eliminated income taxes on families making around $75,000. The combination of the increased standard deduction and the larger child credit means a family of four earning that amount owes maybe a couple hundred dollars, while a single mom with two kids would owe only around $1,000, or $11,000 less than Bezos’ claims.
Two, the real tax burden on the middle class these days are wage taxes to cover Social Security and Medicare. In Bezos’ example, that’s likely the source of the $12,000 tax bill. But those taxes pay for very progressive benefits to the same group of people, while taxing all the billionaires on all their wealth would not cover the cost of those programs. What to do? Check out this solution.
Back to Bezos’ broader point — the federal government wastes enough money that it could afford to stop taxing lower-income earners without reaching further into anyone else’s pocket. He made this explicit when Sorkin pressed him, responding: “You could double the taxes I pay and it’s not going to help that teacher in Queens, I promise you.”
The irony that this clear defense of Main Street comes from the world’s wealthiest person is not lost on us. But the reality is that endless tax hikes are not a substitute for effective governance, and punishing capital does not help the people politicians claim to represent. S-Corp has been making that case for years. It’s nice to hear a rich guy step up and make it too.
Thune Talks Main Street Tax Relief
As part of National Small Business Week, Senate Majority Leader John Thune took to the Senate floor to highlight how provisions like permanent Section 199A, bonus depreciation, estate tax relief and other provisions from last year’s Working Families Tax Cuts are helping Main Street employers hire new workers and reinvest in their communities.
As Thune put it:
Nearly half of Americans in the private sector work for a small business. Small businesses are responsible for a majority of the new jobs in this country. And a lot of Americans’ first jobs were at a small business, mine included…There’s nothing small about the impact that small businesses have in our country.
That point often gets lost in Washington’s tax debates. Today’s tax conversations tend to focus on large publicly-traded corporations, while the pass-through businesses employing most Americans are treated as an afterthought. Thune’s remarks were a useful reminder that the Main Street economy remains the backbone of job creation and economic growth in the country.
He also highlighted the importance of making 199A permanent:
I’ve heard positive feedback on 199A across industries in my state. In South Dakota, an agricultural cooperative estimates the impact of this one policy at over $100 million since 2017 – and that money has been able to be passed on to the farmers that are members of that co-op. And I’m sure that those farmers – like so many small businesses across the country – are relieved that 199A is here to stay.
Certainty matters. For years, Main Street employers operated under a cloud that key provisions of the 2017 tax law would expire, making long-term planning more difficult while setting the stage for steep tax hikes. Permanence gives family-owned businesses more confidence to invest for the long haul.
Thune also focused on bonus depreciation and the practical impact it can have for smaller operations:
Say you’re a farmer and you need to replace your combine, or a manufacturer who needs to upgrade your machinery, or a plumber who needs a new truck. Those are all big expenses, especially for a small, maybe even in some cases, one person operation. So bonus depreciation helps small businesses take on that big expense by allowing them to deduct the entire thing in that one year, and the impact can be significant.
Tax policy is too often described through abstract budget tables and revenue estimates, but for Main Street businesses these provisions frequently determine whether an expansion, equipment purchase, or hiring decision happens at all. The examples Thune cited are familiar to businesses in every state and district.
Thune closed by pushing back on claims that the tax package primarily benefited wealthy taxpayers, pointing out that workers, family businesses, and local employers are already seeing the impact. And as we’ve seen post-tax filing season, the refund and broader relief data backs that up. That’s the story we’re going to have to keep conveying.