Conservatives Urge House to Fully Drop State-Local Tax Deduction

By Che Odom

Retaining the federal deduction for property taxes paid to state and local governments would only incentivize tax hikes for land owners, according to a conservative economist speaking in Washington, D.C.

Jonathan Williams, chief economist and vice president of the Center for State Fiscal Reform at the American Legislative Exchange Council, told people gathered at an event sponsored by the conservative Heritage Foundation that all state and local deductions should be eliminated from the federal tax code.

Currently, the federal code allows people to deduct the cost of sales, income, and property taxes paid to state and local governments (SALT deduction).

The House Republican tax bill would limit the deduction to state and local property taxes up to $10,000. However, the House Ways and Means Committee confirmed that the tax bill preserves the full SALT deduction for corporations and passthrough entities.

The SALT deduction measure for property taxes is an attempt to assuage lawmakers from higher-tax states that have said they wouldn’t support a tax bill that eliminates the deduction. However, negotiations in Congress continue and the bill is undergoing revisions. The Senate Finance Committee is also working on its own plan, which could emerge later this month.

Rachel Greszler, a research fellow in economics, budget, and entitlements at the Heritage Foundation, said she predicted that state and local property taxes would increase if the compromise becomes law because local officials will use the deduction as a way of selling the increase.

She said the benefits of the deduction flow to the “high-tax states” and those with high incomes.

In addition, preserving the deduction for property taxes and maintaining the exemption for municipal bond interest prevents Congress from lowering tax rates, which are needed to spur economic growth, Greszler said.

Pennsylvania state Rep. Seth Grove (R) said he would “love to see” the property deduction eliminated because he has seen significant “overspending” by local school boards, including those with “bloated pensions.”

Corporations, Passthroughs Keep Deduction

However, the House GOP tax bill creates a loophole, allowing the SALT deduction to remain in place for corporations and passthrough entities, such as partnerships, S corporations and some trusts, according to New York University law professor David Kamin. In passthrough entities, the owners are directly taxed individually on the income, taking into account their share of the profits and losses, rather than the businesses.

Kamin, former special assistant for economic policy to President Barack Obama, said in a Tweet Nov. 6 that the bill doesn’t restrict the size of business that may claim the deduction. “Loophole would most benefit highest income owners. And employees lose their deduction,” he said in a Tweet.

‘Double Standard’

Americans Against Double Taxation, a coalition of local and state governments groups, realtors, teachers unions, and other organizations that support the individual deduction, have called repeal of the tax break a “double tax, double standard.”

The Republicans “believe the SALT deduction is good tax policy when it comes to corporate America, but they treat it as a waste of money when it benefits middle class America,” Bob Chlopak, co-director of Americans Against Double Taxation, said in a statement.

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.