C-SALT and the Potential for a Stealth Increase in the Corporate Tax Rate

By: Stuart E. Leblang, Michael J. Kliegman, Geoffrey K. Verhoff, Amy S. Elliott and Ryan Ellis 

Investors in U.S. stocks pushed markets higher¹ after the November election gave them hope that President Trump’s plans for tax cuts and deregulation would boost corporate profits. But lawmakers are increasingly considering adopting a new cap on the deductibility of state and local taxes (SALT) by corporations (so-called C-SALT), which could turn out to be a major pay-for in a future tax bill² and a stealthy corporate tax increase.

Enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), the current SALT cap is a $10,000 limitation on the ability of individuals who itemize ³ to deduct nonbusiness state and local income, property and sales taxes.⁴ Although the cap, which has attracted the ire of some blue-state Republicans,⁵ is scheduled to go away in 2026, at one time, Republican leadership proposed doing away with the individual SALT deduction altogether (essentially, lowering the $10,000 cap to $0) because they believe it “federally subsidizes the tax-and-spend policies of liberal states.”⁶

There is currently no cap on the ability of corporations to deduct state and local income, property and sales taxes on federal corporate income tax returns (with the exception of the corporate alternative minimum tax, which generally only impacts very large corporations with relatively low effective corporate tax rates⁷).

Among the 44 states that levy a corporate income tax, the median state income tax rate is 6.5 percent (and note that states  also impose property and sales taxes on corporations, which are sometimes even more economically significant).⁸ Allowing a federal deduction for the entire 6.5 percent state corporate income tax bill essentially means that the tax-effected state rate is really only 5.135 percent. (Businesses not organized as C corporations—partnerships and S corporations, for example—have had to carefully navigate the current SALT cap to ensure that they can still deduct their SALT expenses. For more on this, see “SALT Cap Workarounds.”)

However, in early January, House Budget Committee Chair Jodey Arrington, R-Tex., proposed imposing a SALT cap on corporations. ⁹ A few days later, a “menu of reconciliation options” (reportedly prepared by House Budget Committee Republicans) proposed, among other possible revenue raisers, a complete elimination of the SALT deduction for businesses. ¹⁰  Members of the House Freedom Caucus including Rep. Andy Harris, R-Md., have come out in favor of some form of C-SALT limitation. ¹¹  One version of a C-SALT limit—repealing C-SALT for state income taxes but preserving the ability of a corporation to deduct state property and sales taxes, such that the overall revenue effect would be much smaller¹²—was also floated back in December by the Bipartisan Policy Center.¹³

All of these C-SALT reforms (either caps on the deduction or various versions of deduction repeal) have been floated in an effort to achieve parity among taxpayers as lawmakers proceed with the difficult task of finding ways to reduce the deficit impact of their tax policy priorities. Because Republicans will need near unanimity within their party to get a reconciliation bill across the finish line,¹⁴  they now seem willing to extend some relief in connection with the individual SALT cap (extending the cap past 2025, but increasing it from $10,000 to $20,000,¹⁵  for example) to get blue-state Republicans to support the bill.¹⁶ If lawmakers are going to continue to limit the benefit of SALT for individuals, why not extend the limit to businesses, especially if it could raise significant revenue (nearly $800 billion over 10 years, if the C-SALT cap is broad¹⁷), helping to offset increased SALT relief for individuals (which could cost some $170 billion over ten years, if the SALT cap is extended but doubled for joint filers¹⁸)?

Impact on Corporate Tax Rate

Negotiations around a potential cap on the ability of businesses to deduct their SALT expenses could have a significant impact on the effective corporate tax rate. Eliminating the ability of a corporation to take a SALT deduction will cause the corporation’s federal income tax bill to rise and its profits to shrink. Depending on the company, repeal of the SALT deduction could be material. Profitable companies with primarily U.S. source income and major operations in states with high corporate income and property taxes (such as New Jersey, for example) and that do not have a significant tax shields like depreciation will be hardest hit.

We have provided a few examples of companies with relatively large exposure to state taxes:

The negative economic implications of C-SALT may not be as obvious as an increase in the headline corporate income tax rate, but the effect is the same. Although it is hard to make generalizations because each company’s SALT exposure is unique, based on a review of IRS statistical data, it appears that companies in the following industries have an increased risk of impact from a C-SALT limitation (although there are others): educational services; employment services; computer system design; and warehousing and storage.²⁵

SALT Cap Workarounds

This new attempt to achieve parity between the extent to which state taxes imposed on individuals and businesses are subsidized by federal taxpayers marks a significant evolution in the thinking behind how the original SALT cap fit into TCJA. It was, in the most basic sense, simply a pay-for that happened to disproportionately impact a less-than-sympathetic cohort from Republicans’ perspective: high-income individual taxpayers residing in high-tax (largely Democratic) states.

Absent relief, pass-through business owners who claim their business items of income, loss, gain and deduction on their individual returns could have been impacted by TCJA’s SALT cap. However, as it was apparent Congress didn’t intend to limit businesses’ ability to deduct SALT expenses when it imposed a SALT cap on individuals, many states quickly stepped up to pass SALT parity laws that the Internal Revenue Service (IRS) blessed as consistent with Congressional intent.²⁶ These so-called pass-through entity tax (PTET) workarounds allow partners and S corporation shareholders to avoid the individual SALT cap.²⁷

This gets us to yet another surprise tax increase that could be on the table—Congress may decide to change its tune regarding these state workarounds for pass-through businesses. If lawmakers seeking SALT parity decide to impose a C-SALT cap, then these workarounds could be viewed as a loophole that Congress needs to close. The combination of a narrow C-SALT limitation—only repealing state income tax deductions—and shutting off PTET workarounds could generate an estimated $390 billion in revenue over 10 years.²⁸

Looking ahead, traders should consider the risks that these possible revenue raisers pose to the market value of publicly traded companies. As there are a lot of moving parts, including the possibility of a targeted corporate rate reduction to 15 percent for those companies that manufacture products in America, a possible C-SALT limitation should be viewed in context with other tax changes lawmakers are considering.

We expect that if C-SALT gains traction, then closing down PTET workarounds will also be under serious consideration. Similarly, if the business community and other stakeholders can organize a full-throated effort to preserve the value of their ordinary and necessary business expense deductions, then lawmakers may be convinced that they need to find offsets elsewhere. Groups are already forming to try to stave off the threat of C-SALT or at least limit the damage by preserving the ability of businesses to write off their property taxes. Akin is organizing a coalition to educate Congress and the Trump Administration on how changes to C-SALT and PTET would impact businesses.

One or more authors may have positions in stocks referred to in this article. Akin Gump may represent individuals or entities that may have positions in stocks referred to in this article.

^{[1] The S&P 500 closed Nov. 5, 2024 at $5,782.76. It increased to $6.001.35 by Nov. 11, 2024 and has continued to trend higher the last few months, recently reaching $6,118.71 at close Jan. 23, 2025. That marks a 5.8 percent increase since the election.}

^{[2] According to the Penn Wharton Budget Model, a $10,000 C-SALT cap would generate $793 billion over 10 years (https://budgetmodel.wharton.upenn.edu/estimates/2025/1/13/limit-corporate-deductions-for-state-and-local-taxes-to-10000).}

^{[3] The standard deduction in 2024 is $14,600 for single filers and $29,200 for married filing jointly (Rev. Proc. 2023-34).}

^{[4] Internal Revenue Code (IRC) § 164(b)(6) generally provides a $10,000 annual cap on an individual’s ability to deduct state and local income and property (real and personal) taxes (among others, including state and local sales taxes in lieu of state and local income taxes) on a federal tax return. Note that the cap is $10,000 regardless of whether an individual is filing as single, head or household or married filing jointly (although, in the case of married filing separately, the deduction is capped at $5,000).}

^{[5] Taxpayers in Democratic-leaning states like California, New York, New Jersey and Connecticut are most impacted by the cap, as those states have the highest effective SALT tax rates.}

^{[6] See the Republican Study Committee Fiscal Year 2024 Budget released June 14, 2023 (https://hern.house.gov/uploadedfiles/202306141135_fy24_rsc_budget_print_final_c.pdf).}

^{[7] The 15% corporate alternative minimum tax (CAMT) effectively overrides the corporate SALT deduction (among other deductions) for a firm within scope (a firm that, taken together with certain related entities, generally had over $1 billion in annual adjusted financial statement income averaged over the prior three years) that has not paid an amount of regular tax that is at least 15 percent of its adjusted financial statement income.}

^{[8]Abir Mandal, State Corporate Income Tax Rates and Brackets, 2025, Tax Foundation (Jan. 21, 2025) (https://taxfoundation.org/data/all/state/state-corporate-income-tax-rates-brackets/). See also Note 13.}

^{[9] Laura Weiss, John Bresnahan, Melanie Zanona and Jake Sherman, Arrington ‘accidentally’ pitches raising taxes in presentation to House GOP, Punchbowl News AM (Jan. 10, 2025).}

^{[10] Laura Weiss, House Budget floats menu of reconciliation options, Punchbowl News (Jan. 17, 2025) (https://punchbowl.news/article/finance/economy/house-budget-floats-menu-reconciliation-options/)}

^{[11] Benjamin Guggenheim, Freedom Caucus floats corporate tax boost in exchange for easing state, local deduction cap, Politico (Jan. 15, 2025) (https://www.politico.com/news/2025/01/15/freedom-caucus-corporate-tax-boost-00198372).}

^{[12] Instead of $793 billion over 10 years (if the cap applies not only to states income taxes, but also to state property taxes), capping the ability of a corporation to deduct only its state income taxes at $10,000 would result in only $290 billion over 10 years, according to the Penn Wharton Budget Model (https://budgetmodel.wharton.upenn.edu/estimates/2025/1/13/limit-corporate-deductions-for-state-and-local-taxes-to-10000).}

^{[13] Andrew Lautz and Upamanyu Lahiri, Paying the 2025 Tax Bill: SALT Deductions, Bipartisan Policy Center (Dec. 5, 2024) (https://bipartisanpolicy.org/explainer/paying-the-2025-tax-bill-salt-deductions/).}

^{[14] This assumes Democrats will not be willing to vote in favor of legislation extending the individual tax cuts from the 2017 Tax Cuts and Jobs Act in the context of reconciliation.}

^{[15] For example, H.R. 7160, the SALT Marriage Penalty Elimination Act, would raise the cap from $10,000 to $20,000 for joint returns with AGI below $500,000 in 2023. (Although in H.R. 7160, the SALT cap would be allowed to expire in 2026.)}

^{[16] Rep. Mike Lawler, R-N.Y., said in December 2024 that he “will not support a tax bill that does not lift the cap on SALT” (https://x.com/RepMikeLawler/status/1863361999670804873). Further, President Trump has also repeatedly made clear that he wants to provide some kind of SALT relief.}

^{[17] Supra Note 2.}

^{[18] Or $110 billion if the $20k cap is only for those earning less than $500k, Weakening the SALT Cap Would be a Costly Mistake, Committee for a Responsible Budget (Jan. 9, 2025) (https://www.crfb.org/blogs/weakening-salt-cap-would-be-costly-mistake).}

^{[19] Except for Strategic Education, Inc., whose most recent financials are for 2023.}

^{[20] Assuming current state income tax deduction is entirely denied at 21% federal headline rate.}

^{[21] https://www.sec.gov/ix?doc=/Archives/edgar/data/0000931015/000162828025006009/pii-20241231.htm}

^{[22] https://www.sec.gov/ix?doc=/Archives/edgar/data/0000315213/000031521325000007/rhi-20241231.htm}

^{[23] https://www.sec.gov/ix?doc=/Archives/edgar/data/1013934/000101393424000004/stra-20231231.htm}

^{[24] https://www.sec.gov/ix?doc=/Archives/edgar/data/1166691/000116669125000011/cmcsa-20241231.htm}

^{[25] Based on a comparison of the “taxes and licenses” deduction (line 17 on the Form 1120, U.S. Corporation Income Tax Return), which includes more than just state and local taxes paid or accrued during the tax year, with net income across various industries. This data (from Table 5.1) is based on the returns of active corporations for Tax Year 2020 (and all figures are estimates based on samples) as included in the 2020 Corporation Income Tax Returns Complete Report produced by IRS Statistics of Income (https://www.irs.gov/pub/irs-pdf/p16.pdf).}

^{[26] See Notice 2020-75, “Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes,” which provides that “State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation.” But see Notice 2019-12 and TD 9864, in which the IRS attacked another SALT cap workaround facilitated by certain states involving contributions (in lieu of taxes) to state-operated public purpose foundations. The idea of that workaround was that individuals would make a payment to such a charity (instead of paying their state or local tax) and the payment would be treated as satisfying the individual’s state or local tax obligation (because the individual received a state or local tax credit in return for its contribution), and the individual would then fully deduct the payment as a charitable contribution (which are not capped as long as the individual itemizes their deductions).}

^{[27] And, to be fair, these workarounds are sometimes used by certain taxpayers to deduct not just business SALT expenses, but also individual SALT expenses associated with nonbusiness income, arguably in violation of the spirit of the original cap.}

^{[28] SALT Deduction Resources, Committee for a Responsible Federal Budget (https://www.crfb.org/our-work/issues/salt-deduction-resources).}

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