State Groups Vow Fight for Tax Deduction Despite Trump, Big Six

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

Groups representing state and local officials will lobby hard to persuade members of Congress not to go along with calls from President Donald Trump and GOP leaders to end the federal deduction for taxes paid to state and local governments.

And they already have an ally in U.S. Rep. Tom MacArthur (R-N.J.), who told reporters after the latest Republican tax framework was unveiled Sept. 27 that he’s a “loud objector” to the plan because it eliminates the state and local tax deduction.

Elimination of the deduction could pressure local governments to lower their taxes at a time when states and cities are already facing revenue challenges.

“The loss in local revenues could result in a cut in local services,” Elizabeth Kautz, mayor of Burnsville, Minn., and member of Americans Against Double Taxation, said Sept. 27. “It will be a further erosion of the partnership that we have offered and continued to seek. Any changes will disrupt the ability of state and local government to raise the revenue they need to support critical public services.”

The group of congressional leaders and White House officials known as the Big Six released the framework of tax legislation Republicans hope to pass this year. The framework provides that “in order to simplify the tax code, the framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.” This would drop the state and local tax (SALT) deduction.

The Big Six include House Speaker Paul Ryan (R-Wis.), Senate Finance Chairman Orrin Hatch (R-Utah), Senate Majority Leader Mitch McConnell (R-Ky.), House Ways and Means Chairman Kevin Brady (R-Texas), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn.

Republican Dissent

MacArthur’s comments signal the challenges facing Republican leaders as they try to sell the plan to members in high-tax states like New York and New Jersey.

“I have made this clear, and others have too. This is not the way to bring taxes down—not on the backs of people in the highest-tax states in the country,” he said, adding that he likes other elements of the framework.

Some Republican members have floated the idea of turning the state and local deduction into a credit to soften the impact. Republican leaders “want that dialogue about solutions,” U.S. Rep. Tom Reed (R-N.Y.) told Bloomberg BNA Sept. 27.

Important for Middle Class

The Republican framework identifies among its goals tax relief for middle-class families. However, Andrew Koneschusky, spokesman for Americans Against Double Taxation, told Bloomberg BNA that the SALT deduction is important to middle-class taxpayers and homeowners.

The deduction is “especially important to middle class homeowners who will see their taxes increase by $815 on average if the deduction is eliminated—even if the standard deduction is doubled,” he told Bloomberg BNA.

“Coalition members are ready for this and have been gearing up for months for a nationwide, bipartisan fight.”

On Sept. 27, 130 bipartisan mayors urged Congress to maintain the SALT deduction. Governors, mayors, county officials, realtors, educators, public safety officials and others are mobilizing to encourage members of Congress to vote in the interests of their districts and their constituents, Koneschusky said.

After announcement of the Big Six’s plan, Matt Zone, a Cleveland councilmember and president of the National League of Cities, said in a statement that the “reform effort cannot eliminate the critical tools that enable cities to strengthen communities, make infrastructure investments and keep residents safe.”

The league will fight for the deduction, he said, adding this “is not a red versus blue issue, and this is not a coastal-cities versus the heartland-cities issue.”

‘Death Blow’

In 2015, Internal Revenue Service data show, an average U.S. taxpayer claimed about $3,598 for the SALT deduction, according to a Bloomberg analysis.

In New York’s 12th congressional district on Manhattan’s east side, the average was $31,078—the highest of the nation’s 435 districts. In California’s 18th district on the San Francisco Bay, it was $26,668. Both districts—and in fact, eight of the top 10 districts for use of the SALT deduction—are represented by Democratic lawmakers.

New York Gov. Andrew Cuomo (D) has called the elimination of the deduction a “death blow” to New York by putting it at a competitive disadvantage.

Cuomo told reporters Sept. 27 that elimination of the deduction was illegal, unconstitutional and amounted to “double taxation.” He said 3 million New Yorkers would pay an additional $17 billion in federal taxes, as a result.

“It is the height of hypocrisy,” Cuomo said. “Literally, they want to tax you on the taxes you pay. It is a pure tax increase.”

“This is a tax plan for the one percent,” California Assemblymember Phil Ting (D) said in a Sept. 27 statement. “Flattening our tax code will benefit the wealthy and corporations. If this passes, we will see even more economic inequality in our country and greater pressure on state budgets. However, California cannot fill the gap left by a retreating federal government on basic human needs.”

‘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.

That the deduction is on the table isn’t a surprise, but its actual elimination would be, a senior staff adviser to a ranking House GOP member told Bloomberg BNA. The deduction “is, more likely than not, safe,” he said, adding that talk about tax reform through raising the deficit is increasing in the House. Too many taxpayers in red districts take the deduction, and lawmakers will be pressured to keep it, he said.

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.

Muni Exemption Safe

Currently, the tax code exempts from taxes interest earned from municipal bonds, which are the primary method used by states and local governments to finance public projects, including roads, bridges, schools, hospitals, and water infrastructure. The exemption reduces the cost of issuing municipal bonds, and it makes bonds more attractive to investors.

Under the tax framework unveiled Sept. 27, the exemption would continue. Municipal bonds could become an important method for financing some of the $1 trillion worth of infrastructure spending advocated by Trump.

Max Behlke, budget and tax director of the National Conference of State Legislatures, said state and local lawmakers, as well as other city and state officials, will be pleased if the exemption goes unscathed.

Countless Other Deductions

Their attention, however, will remain on saving the federal deduction for taxes paid to state and local governments. The deduction has existed in the federal tax code since its inception “because federal tax writers were cognizant of not taxing individuals’ incomes twice,” Behlke said.

If Congress is looking to offset tax rate cuts by eliminating or curtailing exemptions and deductions, “they have a countless number to pick from that, unlike the SALT deduction, will not lead to higher tax bills for middle class Americans if they are eliminated,” he said.

“As a central tenet of tax reform is to provide tax relief for the middle class, NCSL is surprised and dismayed that the released tax reform framework will eliminate a deduction that is vital to middle-class taxpayers,” he said.

“Moreover, in addition to harming middle-class taxpayers, eliminating SALT jeopardizes the ability of states to invest in infrastructure, fund education, and provide the vital public services that Americans expect from their state and local governments,” he added.

Big Blue States

New York’s Republican delegation in Congress has repeatedly defended the SALT deduction.

“As I’ve said from day one, eliminating the federal deduction for state and local taxes will unfairly burden the over 3 million hardworking taxpayers in New York who claim the deduction,” Claudia Tenney (R-N.Y.) told Bloomberg BNA in a statement. “Until New York completely overhauls its tax code, removing this provision will strip primarily middle- and low-income New Yorkers of their only real tax relief.”

The combined state and local income taxes on New York City’s highest earners amounts to 12.7 percent, second in the nation’s to California’s 13.3 percent, according to E.J. McMahon, research director for the Empire Center for Public Policy in New York.

But for the top 1 percent of earners, elimination of the SALT deduction under the Trump plan would have little impact, McMahon told Bloomberg BNA Sept. 27. “The very highest earners will realize almost no net tax savings.”

For New York City residents in the top state bracket, savings from federal tax cuts would be almost totally offset by the loss of the state and local tax deduction, according to McMahon.

“The bottom line is, a lot of this depends on the passthrough,” McMahon said. “If you own a passthrough entity, you’d get a much bigger tax cut.”

Elimination of the state and local tax deduction would make New Yorkers more aware of their local tax burden and give them more incentive to move to no-income tax states like Florida, he said.

‘Purely Political Fight’

Heather C. Briccetti, president and chief executive officer of the Business Council of New York State, said elimination of the deduction for state and local taxes is “unacceptable to New Yorkers.”

“We applaud Washington’s focus on reducing business and personal income tax burdens, but cannot support a proposal that unfairly burdens New Yorkers,” she said in a statement. “In case the administration has forgotten, New York State and its residents pay far more in federal taxes than the state receives in federal spending—by almost $40 billion, according to the state budget office.”

Fred L. Slater, a sole practitioner in the New York City accounting firm MS 1040 LLC, told Bloomberg BNA that elimination of the deduction for state and local taxes is “an attack on the Democratic party.”

“That is setting up a purely political fight,” he said in a Sept. 27 email. “In short, the vague proposal is clearly a win for the wealthy and clearly a loss for the rest.”

‘Dire Consequences’ for N.J

New Jersey State Sen. Kip Bateman (R), the deputy leader of the Senate Republic Conference, said elimination of the deduction would have dire consequences for his state.

“I’m gravely concerned that tax reform efforts that are intended to ease the federal tax burden will instead have the opposite effect for many New Jerseyans,” Bateman said in a statement. “Losing the ability to deduct property taxes and state income taxes could lead to higher federal tax bills for many working, home-owning families in New Jersey.”

According to Bateman, the average New Jersey property tax bill is over $8,500 annually, which would “offset” two-thirds of the proposed increase in the standard deduction for a married couple filing jointly. “For a couple in our area that owns a home with both spouses employed, it’s likely they’ll end up with a higher federal income tax bill, even with the increased standard deduction,” he said.

‘Single Biggest Loser’

“Abolishing the deduction would represent double taxation in states like California that are already paying more than others into the U.S. Treasury,” California Senate President Pro Tempore Kevin de Leon (D) said in a Sept. 27 statement. “As a donor state, California receives nearly $0.25 less in return for every dollar sent to the federal government than the national average. Eliminating the deduction would also be a significant direct hit to the pocket books of hardworking California taxpayers, will ultimately result in reduced funding available for infrastructure spending, and cause possible cuts to local services and vital state and local programs. Republicans in Washington have once again zeroed in on California to punish us and make our state the single biggest loser in their reckless tax scheme.”

“The tax proposal unveiled today would raise taxes on the lowest earners, and repeal vital personal exemptions for dependents while providing huge tax breaks for the wealthiest individuals and corporations,” he said. “We have tried trickle-down economics before and learned the magic simply does not exist.”

“I am disappointed that the Trump administration would use desperately needed tax reform as a tool to play partisan politics,” California State Controller Betty T. Yee said in a Sept. 27 statement. “His proposal will benefit billion-dollar corporations and the wealthy CEOs who run them while increasing the burdens for many Americans with limited income—exacerbating our nation’s pervasive inequality. Elimination of the state and local tax deduction could lead to an economic downward spiral in California, including the loss of good-paying jobs and cuts to critical public safety and social service programs.”

With assistance from Colleen Murphy in Washington; Laura Mahoney in Sacramento, Calif.; Leslie A. Pappas in Philadelphia; and Gerald B. Silverman in Albany, N.Y.

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

For More Information

The tax reform framework is at http://src.bna.com/sS3.

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State