State Deduction Needed for Tax Reform After Health Care Failure

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

Republicans’ failure to repeal the taxes underlying the Affordable Care Act makes eliminating the deduction for state and local taxes even more important to their tax reform plans.

The ACA repeal failure makes revenue-neutral tax reform harder, Frank Sammartino, senior fellow at the Urban Institute’s Tax Policy Center, told Bloomberg BNA. The savings from the American Health Care Act were to be used to help pay for the rate cuts envisioned by Republicans and President Donald Trump.

Ending the state-and-local deduction, a move pushed by Trump as well as congressional Republicans, would free up $1.3 to $1.7 trillion over 10 years, according to the Tax Policy Center and the Tax Foundation, respectively. The deduction is one of the costlier items in the tax code.

Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn have been meeting with lawmakers, including Senate Majority Leader Mitch McConnell (R-Ky.), House Speaker Paul Ryan (R-Wis.), and House Ways and Means Committee Chairman Kevin Brady (R-Texas), on the tax reform outline that involves eliminating the SALT and other deductions as well as lowering tax rates.

“Federal tax reform seems much more likely to get done,” Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy, told Bloomberg BNA. “One of the key reasons is there has been a lot of engagement by the Trump administration.”

Tax changes will still be hard to get through Congress, but Republicans are starting a from a different, better place than they did with health care, she said.

A revenue-neutral tax plan passed using the budget reconciliation process would allow the Senate to pass tax reform with just 50 votes, and Vice President Mike Pence could provide the tie-breaking vote, if needed.

$1.3 Trillion

The SALT deduction, if overall tax reform advances, will likely be eliminated, Wiehe said.

Most Republicans are committed to ending it, arguing that many of the taxpayers who take the deduction will still benefit from overall tax rate reductions. Taxpayers with incomes of more than $100,000 would have the largest tax increases both in dollars and as a percentage of income if the deduction is nixed, the Tax Policy Center said.

“In our tax reform plan, Americans are going to see some significant tax cuts and often without having to itemize,” Brady told reporters July 17. “We are going to deliver without state and local taxes being an itemized deduction.”

Critics say the deduction works as a subsidy and encourages states, such as California, New York, and Connecticut that are dominated by Democrats, to set higher rates and spend more taxpayer money.

Elected officials in those states, among other Democrat-leaning ones, have been vocal in opposing the plan to eliminate the SALT deduction.

“According to the Joint Committee on Taxation, more than 88 percent of the benefit of state and local tax deductions accrued to those with incomes over $100,000 in 2014, while only 1 percent flowed to taxpayers with incomes below $50,000,” according to a report from the Washington-based Tax Foundation.

Trump’s plan would eliminate more than $67 billion in state and local tax deductions reported by New Yorkers on their federal income taxes, according to a report by state Comptroller Thomas DiNapoli.

State Fight for Deduction

Groups that represent state and local governments also are fighting for the deduction’s survival.

In an April letter to Congress, the Big 7, a coalition of organizations including the National Governors Association, the U.S. Conference of Mayors, and the National Conference of State Legislatures said eliminating or capping “federal deductibility for state and local property, sales and income taxes would represent double taxation, as these taxes are mandatory payments for all taxpayers.”

Eliminating the SALT deduction would come at a cost to state and local governments, according to the Tax Policy Center report. “It could affect the mix of revenue sources used by state and local governments and could lead to reductions in spending for programs and services,” it said.

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

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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