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
A leading state and local practitioner said that states shouldn’t expect negotiations to be difficult between U.S. House and Senate leaders over differences in their tax reform proposals— including over the federal deduction for taxes paid to state and local governments.
“The goals are largely the same. The approaches are largely the same. We are not talking about big philosophical differences among the negotiators,” Harley Duncan, tax managing director of state and local tax at KPMG LLP, said during a Nov. 17 National Conference of State Legislatures task force meeting in Miami.
State and local governments have expressed concerns about the tax break, full expensing of capital purchases, and other provisions of both tax reform plans that differ in their details.
The House voted 227-205 Nov. 16 to pass the Tax Cuts and Jobs Act (H.R. 1). The Senate Finance Committee approved its tax reform package late Nov. 16 by a party line, shortly after a manager’s amendment was introduced by the panel’s chairman Sen. Orrin G. Hatch (R-Utah) near the end of the hearing. More changes to the Senate plan are likely coming after the Thanksgiving recess. The measure isn’t yet in legislative language.
Republican leaders have said they hope to get a tax bill for President Donald Trump to sign by the end of the year.
On the issue of the state-and-local tax deduction, known as the SALT deduction, the House and Senate proposals, so far, are different. The Senate would eliminate the deduction for sales, income, and property taxes paid at the state and local level, while the House bill would preserve it for property taxes paid to state and local governments up to $10,000.
Repeal of the deduction is seen as one of the revenue raisers in the House and Senate plans and necessary to pay for cuts in corporate and individual rates.
The difference on this issue, as well as the expensing of capital purchases and a deduction for net interest payments by businesses, isn’t too much for the House and Senate to overcome when the two congressional houses go into conference, Duncan said.
A coalition of groups hoping Congress will keep the SALT deduction is warning that the House’s compromise on the tax break could erode under pressure from Senate Republicans.
Negotiation between “a House bill with partial elimination and a Senate bill with full elimination is not likely to end with much, if any,” of the SALT deduction remaining, Americans Against Double Taxation wrote in a letter Nov. 15 to members of Congress.
Americans Against Double Taxation is a coalition of state and local government groups, teachers unions, realtors, and other organizations that are fighting against repeal of the SALT deduction.
Senate and House Republicans also are moving to allow businesses full and immediate expensing of large capital purchases, such as machinery, for up to five years—but disallowing some net interest deduction by those same companies to avoid debt financing, Duncan said. Currently, business are allowed to take deductions on capital purchases over a period of years.
The move to full expensing could lead to lower revenue for states that conform to such a change.
As a rule, “states do not like to be tied to timing provisions that immediately impact revenue in a negative way,” Jamie Yesnowitz, principal and state and local tax practice and National Tax Office leader at Grant Thornton LLP, told Bloomberg Tax.
“It is highly likely that a substantial number of states will decouple from that provision,” he said.
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