Is State Deduction Tax Reform’s Last Hope With ACA Repeal Dead?

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By Che Odom

Elimination of the federal deduction for taxes paid to state and local governments may stand as the last hope to pay for sweeping, revenue-neutral tax reform as Republican attempts to repeal the Affordable Care Act again hit a wall.

However, a state lawmaker from New Jersey and a senior staff adviser to a ranking Republican member of the U.S. House told Bloomberg BNA that they feel increasingly confident the deduction will be spared.

“I think we’re just looking at tax cuts this year, and they probably won’t do anything more next year ahead of the 2018 mid-term elections,” said the N.J. state legislator, who didn’t want his name used to preserve good working relationships with members of Congress.

Senate Majority Leader Mitch McConnell (R-Ky.) said Sept. 26 that the Senate wouldn’t vote on the leading, and latest, GOP repeal and replace effort offered by Sens. Lindsey Graham (R-S.C.) and Bill Cassidy (R-La.). That effectively erases the chance that taxes related to the Affordable Care Act may be eliminated.

That money is needed if GOP lawmakers are to accomplish revenue-neutral tax reform without ending or capping the federal deduction for state and local taxes, the staff adviser said. More details on the Republicans’ plan for tax reform are expected this week.

‘Likely’ Safe?

Ending the deduction could raise between $1.26 trillion and $1.9 trillion over a decade, according to estimates by the Urban-Brookings Tax Policy Center and the Tax Foundation, respectively.

The deduction, however, “is, more likely than not, safe,” the staff adviser said, adding that talk about tax reform through raising the deficit is increasing in the House.

Congress could abandon the goal of revenue-neutral tax legislation—but that move would create other issues. To get around a lack of Democratic support, Senate Republicans have said they plan to use a legislative maneuver that allows for passing a bill with a simple majority. Under that procedure, any provisions that would expand the long-term federal deficit would have to be only temporary.

Organizations that represent state and local governments, including the National Governors Association and recently formed Americans Against Double Taxation, continue to wage a lobbying effort to save the deduction.

“We have expected for some time that SALT would be a major ‘pay for’ in tax reform regardless of what happens with healthcare, and we don’t see that changing,” Andrew Koneschusky, spokesman for Americans Against Double Taxation, told Bloomberg BNA. “This is going to be a very fierce fight given the importance of SALT to homeowners, infrastructure investments, public services, and millions of middle class taxpayers in both Democratic and Republican congressional districts around the country.”

National Association of Counties Communications Director David Jackson told Bloomberg BNA that Republicans outside New York “will rally” to preserve the state and local tax “deduction when they realize its repeal would be a tax hike on middle class homeowners.”

The deduction, Jackson said, affects every state. “Of the top 20 highest SALT congressional districts, 45 percent are represented by Republicans,” he said.

Watching Health Care

State lawmakers have been watching the health care debate closely, as overhauling health care, “especially the Medicaid program, will require states to implement programmatic changes, and altering the funding formula may have a significant impact on state budgets given that Medicaid is the second largest state expenditure behind education,” Max Behlke, budget and tax director for the National Conference of State Legislatures, told Bloomberg BNA.

Their focus will be on the deduction, the future of which will be determined by what the Republican tax bill looks like, he said.

“Given the dearth of details and lack of consensus behind a tax reform plan, it seems more likely, at least as of today, that Congress will embark on tax cuts, similar to the Bush tax cuts, rather than comprehensive tax reform similar to 1986,” he said.

Tax Reform Alternatives

Morgan Scarboro, policy analyst at the Tax Foundation, said elimination of the deduction isn’t necessarily the last hope for revenue-neutral reform.

On Sept. 21, the Tax Foundation published a paper that suggested four tax plans that are pro-growth and roughly revenue-neutral. They don’t all include the elimination of the state-and-local deduction.

“However, it is certainly an important piece of the conversation because it is one of the largest pay-for’s in tax reform,” Scarboro said in an email to Bloomberg BNA. “Throughout the tax reform process, we’ve been trying to stress that you can’t get dessert without eating your vegetables, too. Repealing the deduction might be politically unpopular in some areas, but it’s the right policy move. The deduction disproportionately helps high-income taxpayers and has lower-income states and regions subsidizing higher-income and tax jurisdictions.”

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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