Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Che Odom
Federal lawmakers and groups representing state and local governments are pushing back against a key deduction contained in the House Republican tax reform plan released Nov. 2.
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 tax bill would limit the deduction to state and local property taxes up to $10,000.
The measure 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, the plan still could undergo revisions before being considered by the House Ways and Means Committee the week of Nov. 6, committee Chairman Kevin Brady (R-Texas) has said. The Senate Finance Committee is working on its own plan, which could emerge later this month.
Congressional Republicans are “trying to rush” the tax proposal through before the public learns its details, U.S. Sen. Chuck Schumer (D-N.Y.) told reporters during a Nov. 2 press conference. Republican members from suburban districts all over the country will pay a political price for a tax plan that takes from the middle class and gives to corporations and the wealthy, he said. Republican members from California may be among those to feel pressure in the coming days, Schumer added.
Republican representatives from New York and New Jersey already said Nov. 2 that they can’t support the Republican tax reform bill because of the proposed cap on the SALT deduction.
“This bill is too much of a burden on New Yorkers,” Rep. Peter King (R-N.Y.) told Bloomberg News.
“I can’t support this in order to give a tax cut to the rest of the country,” King said. “There’s been no real improvement in the bill. The cap on property tax deductions is too low and you still can’t deduct state income taxes.”
Likewise, Rep. Leonard Lance (R-N.J.) said that while there is “much to like” in his party’s tax bill, he can’t support it at this time because of the proposed SALT deduction cap.
Rolling back the deduction will hurt “hard-working middle-class families and our state economy,” he told Bloomberg News in an emailed statement. Lance said he will keep trying to negotiate.
A few representatives of state and local governments told Bloomberg Tax privately Nov. 2 that some restriction on the SALT deduction likely will become law.
The compromise on the SALT deduction seems reasonable, Lori Stolly, a director in the Cincinnati, Ohio, office of Grant Thornton LLP, told Bloomberg Tax Nov. 2. The measure “appears to distribute the deduction benefits more evenly between the states” than the current SALT deduction, she said.
The proposal to limit the deduction is generally opposed by congressional members from high-tax blue states such as New York, New Jersey, Connecticut, and California. Taxpayers in those states would still benefit most from the deduction if it is limited to only state and local property taxes, Stolly said.
“However, the change will likely receive an overall mixed reaction as the modification will disproportionately harm certain taxpayers,” she said. “For example, I would expect taxpayers in states with high property taxes to push back on the limitation.”
Cutting back on the SALT deduction continues to face headwinds in high-tax states such as California, New York, and New Jersey.
Restricting the SALT deduction would have “profound and widespread effects” on the state, according to H.D. Palmer, spokesman for the California Department of Finance. “And even though we don’t yet know all of the offsetting proposals, significantly changing a century-old deduction that affects one out of every three California taxpayers isn’t something that should be rushed into lightly,” he said.
New York Senate Majority Leader John J. Flanagan (R), a strong supporter of state tax cuts, called the proposal on the SALT deduction “another tax obligation.” “This is not a partisan issue, but an issue of fundamental fairness that will greatly affect the quality-of-life for millions of middle-class taxpayers,” he added.
In New Jersey, another high-tax state, the left-leaning New Jersey Policy Perspective said 1.8 million New Jersey households deduct a cumulative $17 billion in state income or sales taxes from their federal taxes. At 40 percent of all taxpaying households, New Jersey ranks third highest in the nation, behind Maryland and Connecticut.
“This deal is still terrible for New Jersey’s working families, with big tax breaks that overwhelmingly go to the wealthiest 1 percent, setting up deep cuts to programs and services that we all rely on,” Jon Whiten, vice president of the organization, told Bloomberg Tax Nov. 2.
“Keeping some of the property tax deduction is a positive step, but it doesn’t fix this terrible proposal,” he said. “It doesn’t even come close.”
The property tax deduction is more targeted to middle-class taxpayers than the income or sales tax deductions, according to Nicole Kaeding, an economist with the Center for State Tax Policy at the Washington-based Tax Foundation.
However, Americans Against Double Taxation, a coalition of state and local groups, said limiting the deduction to $10,000 paid in property taxes, combined with a proposed cut to the cap on the mortgage interested deduction by half, would hit the middle class hard.
The group said in a statement that changes to the two deductions will “result in a double whammy to homeowners, raising tax bills while diminishing home values.” The proposals act as a “backdoor hit” to essential public services, such as education, health care, and infrastructure, it said.
Local governments believe that taxpayers will be more likely to oppose state and local tax increases if the cost of paying those taxes can’t be deducted on federal returns.
Other aspects of the tax plan, such as how depreciated assets are treated, might have a strong chance of making it to President Donald Trump for his signature, though many states likely won’t conform to all federal tax code changes.
States will be watching all of the contents of tax reform as it moves through Congress closely, including the temporary full-expensing provisions, Kaeding told Bloomberg Tax Nov. 2.
“States have been hesitant in the past to conform to temporary tax changes that decrease their revenue, which temporary full expensing would be,” she said. “However, there are a number of offsetting base broadeners to make this easier for state budgets.”
Based on prior experience with federal legislative changes resulting in increased deductibility of depreciable assets, states will probably be split on conformity, Stolly said.
“Certainly some states will choose to decouple in order to avoid any revenue loss,” she said. “However, as with any nonconformity to federal rules, decoupling adds to organizational costs for both taxpayers and administrators.”
The tax plan would allow companies to deduct, in the year of the purchase, equipment or machinery used in a trade or business instead of depreciating it over time.
That makes “no sense economically,” Peter L. Faber, a partner in the New York office of McDermott Will & Emery LLP, said Nov. 2 at an American Bar Association tax conference in Philadelphia.
“Very often when the federal government has adopted accelerated depreciation of one type or another, the states have viewed this as a subsidy,” he said. “If you think about it, expensing is the ultimate acceleration of depreciation—accelerating it to year one.”
Additionally, if expensing is allowed, then the deduction on interest should be curtailed, otherwise “people could go out and borrow money, buy a property, deduct the cost of the property in year one,” he said.
“I think if states curtail expensing, they ought to look at curtailment of interest, because the two really go together,” he said, “and I’m not sure that state legislatures are going to pick up on that, so you could end up with a double disallowance, in effect.”
With assistance from Laura Mahoney (Bloomberg BNA), Leslie Pappas (Bloomberg BNA), Gerald B. Silverman (Bloomberg BNA), Holly Rosenkrantz (Bloomberg), Erik Wasson (Bloomberg), and Catherine Dodge (Bloomberg)
To contact the reporter on this story: Che Odom at COdom@bna.com
To contact the editor responsible for this story: Cheryl Saenz at firstname.lastname@example.org
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