The SALT Ceiling: How Federal Tax Reforms Could Reshape State Revenue Strategies and Investor Portfolios

The state and local tax (SALT) deduction has long been a linchpin of fiscal strategy for high-tax states like New York, California, and New Jersey, which rely on affluent residents to absorb their aggressive tax regimes. But a seismic shift is brewing: federal proposals in the One Big Beautiful Bill Act (OBBB) threaten to upend this dynamic, disproportionately penalizing "specified service businesses" (SSTBs) while creating fertile ground for investors to capitalize on tax-agnostic sectors and states. Let's dissect the implications and uncover where the next wave of growth lies.

The New SALT Rules: A Double-Edged Sword for High-Tax States

The OBBB's most consequential change for SSTBs—law, accounting, healthcare, and finance firms—is the elimination of pass-through entity tax (PTET) deductions at the entity level. Previously, these businesses could shield state taxes as a deductible expense, effectively bypassing the $10,000 SALT cap. Now, those taxes will instead count against the new, phased-in $40,400 SALT cap for joint filers, creating a stark disparity between SSTBs and sectors like manufacturing or agriculture, which retain full PTET deductions.

This shift could drain revenue from states that rely heavily on SSTB activity. Consider New York, where over 40% of state income tax comes from the top 1% of earners—many of whom work in SSTBs. With their tax burden rising, these taxpayers may reduce discretionary spending, relocate, or lobby for state-level reforms.