States Wary of Federal Plan to Eliminate Tax Deduction

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By Tripp Baltz

Among the headwinds facing federal tax reform proposals in Washington is vocal state opposition to the potential elimination of the state and local tax deduction, speakers at a meeting of state lawmakers said.

If the House Republican proposal passes as envisioned, “the state and local tax deduction, something that has been with us since 1913, could go away,” Karl Frieden, vice president and general counsel of the Council On State Taxation, said June 16 during a meeting of the National Conference of State Legislatures. “It would account for about $1.8 trillion, over 10 years, of the $2.3 trillion the House identified as base broadening.”

But there aren’t “as many base broadeners around now” as there were when Congress and the Reagan White House achieved tax reform in 1986, Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, said during a panel at the NCSL’s Executive Committee Task Force on State and Local Taxation in Jackson Hole, Wyo. A “huge amount of tax base broadening” paid for lower rates that helped to create the success of the 1986 reform effort.

During the NCSL meeting, state lawmakers voiced concerns about the impact of the House Republican and Trump administration plans for comprehensive tax reform. The panel with Frieden, Bernstein, and Joe Crosby, principal with MultiState Associates, was followed by a session on whether and how states can broaden their sales tax bases.

Top Concerns

State and local leaders from mostly Democratic-leaning states have been vocal in protesting a plan to eliminate the federal income tax deduction for state and local tax payments.

States are concerned that repealing the itemized deduction for state and local taxes would increase the “after tax” cost of state and local services, particularly for taxpayers in states with high personal income tax rates, Frieden said.

State officials also are worried about lingering talk in Washington of eliminating the federal tax exemption for municipal bond interest.

Repealing that exemption would increase the cost of state and local government financing, Frieden said.

The NCSL, the U.S Conference of Mayors, and five other organizations that represent state and local governments have registered strong opposition to the proposals, Max Behlke, NCSL director of tax and budget policy, said. He said the National Association of Realtors is also on record in opposition because of the potential to harm home ownership and real estate investment.

The association said in a statement that doubling the standard deduction and repealing the state and local tax deduction “would effectively nullify the current tax benefits of owning a home for all but a very few tax filers.” Behlke said reducing the number of taxpayers who itemize their deduction would also reduce the number taking the mortgage interest deduction and deductions for charitable contributions.

Individual Income

Reducing the federal corporate income tax rate has been a chief goal of comprehensive tax reform, but individual income tax rates will come into play as well, Crosby said.

“Some members of the Freedom Caucus are likely to say, ‘We’re not going to have you do all this stuff on the corporate side if you’re not going to do anything for individuals,’” he said.

There hasn’t been a lot of talking about individual income tax reform, but Bernstein said she believed Congress would try to address it. She gave Congress a 60 percent chance of passing a reform package, if not by the end of the year, during the current session. “A lot of House people are concerned they are going to lose their seats if they don’t get something done,” she said.

The outlook for federal tax reform remains unclear as congressional Republicans and the White House continue to differ over how to proceed. Proposed legislative language now isn’t expected until after Labor Day.

To contact the reporter on this story: Tripp Baltz in Jackson Hole, Wyo., at abaltz@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

The agenda for the meeting of the NCSL's Executive Committee Task Force on State and Local Taxation is at http://src.bna.com/pW6.

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