Tax Bill Momentum Tied to Deal on State and Local Deduction

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By Laura Davison and Kaustuv Basu

House Republicans are hammering out a compromise over the state and local deduction in a tax bill after a slew of GOP members from high-tax states balked at a plan that would eliminate the tax break.

The negotiations will be subject to a delicate balance: House leadership needs to broker a deal that is palatable to enough New York, New Jersey, California, and Illinois Republicans to convince them to vote for the bill. But the provision would still need to raise enough revenue to fund lower tax rates.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) met with members of his conference several times the week of Oct. 2 to hear ideas on how to treat the tax break. Lawmakers left meetings with Brady, House Majority Whip Steve Scalise (R-La.), and other leaders confident that a final bill would stop short of outright repeal of the state and local tax (SALT) deduction.

“Leadership is beginning to realize we are not asking for a political gift here,” Rep. Tom MacArthur (R-N.J.) told reporters. “We are asking for the right policy. And the right policy is to not further hammer the states that are paying the most to the federal government now.”

One option in play would keep the deduction for property taxes intact while getting rid of others that make up the SALT deduction, said Ryan Ellis, a conservative who writes about tax reform for Forbes and is a tax adviser to the Family Business Coalition.

MacArthur has suggested a “unified” home deduction that would combine mortgage interest and property tax deductions. Rep. Chris Collins (R-N.Y.) has floated the idea of allowing taxpayers to choose between those two amounts and capping the total amount of deductions one could take. Rep Tom Reed (R-N.Y.) has proposed replacing the deduction with a credit to target the tax relief to middle-income earners.

Crafting a deal could require lawmakers to go against President Donald Trump’s desire to cut the deduction completely. White House press secretary Sarah Huckabee Sanders said Oct. 5 that the president has been clear about his position and the administration plans to move forward with the framework it released last month.

The Senate, however, is inclined to keep the deduction. Finance Chairman Orrin G. Hatch (R-Utah) told reporters Oct. 5. he has “always liked that deduction” and “it is possible that we might even keep it.” Senate Minority Leader Charles E. Schumer (D-N.Y.) said a bill that eliminates the tax break wouldn’t pass.

Blue State Republicans

Taxpayers in states that tend to vote Democratic in presidential elections—New York, New Jersey, Illinois, and California—tend to have higher state and local taxes and would be among the hardest hit if the deduction were to go away. But Republicans still hold a sizeable number of seats in blue states—34 Republicans are from New York, New Jersey, Illinois, and California.

Ellis, who has been in touch with blue-state Republican offices, said that while these lawmakers would prefer to keep the entire SALT deduction, as a matter of preference they are intensely focused on keeping the deduction for property taxes.

“They would be willing in the context of net tax reform to let the rest of it go away as long as there is some recognition for property taxes,” Ellis said.

The political reason: Most people are probably not as conscious of their property taxes while they still have a mortgage. Once the mortgage is paid off, they have to write a check twice a year, Ellis said. Those older voters who have paid off their mortgages are most likely Republican, he said.

Ellis said that some common-sense limitations could be making the property tax deductible for an individual’s first two homes. The other idea could be a dollar cap on a property tax deduction to keep it a “middle-class benefit.”

As for the revenue that might be lost because of any partial repeal, a fourth, higher income tax bracket that has been proposed in the Republican framework might come into play to make up for lost revenue, Ellis said.

House Republicans are pitching their ideas in hopes that a deal can be reached in the coming weeks as Ways and Means puts finishing touches on a bill the committee is aiming to mark up in the coming weeks. Brady said he is listening “very carefully” to concerns of lawmakers from high tax states.

“If you are concerned with regressivity in the tax code, the idea of moving to a credit is a good idea,” Jason J. Fichtner, a senior research fellow at the Mercatus Center at George Mason University, told Bloomberg BNA. “For deductions, the higher your tax bracket, the more the deduction is worth to you.”

Running the Numbers

The SALT deduction is estimated to raise between $1.3 trillion and $1.9 trillion over a decade by the Urban-Brookings Tax Policy Center and the Tax Foundation, respectively. But replacing the deduction with a credit could reduce the revenue generated to $137 billion, according to an estimate from the Tax Foundation.

“If you do that, you’ve eliminated most of the revenue,” Nicole Kaeding, economist at the Tax Foundation, said. “If you take this off the table, I’m not sure where the next pay-for will come from.”

A former Senate staffer who spoke on the condition of anonymity to speak more freely said that tax staffers are running numbers on alterations to the SALT deduction to see what might be possible.

Republican leadership in the House remains hopeful that the ideas under discussion will be enough to placate the House Republicans who don’t like the idea of a full repeal.

The Republicans really need some version of a SALT deduction as a revenue-raiser, and if they fail, they would have to go looking for other revenue raisers—a less palatable option, the former staffer said.

It’s critical to reach a compromise on the issue soon, because constituents in high-tax states are hearing a narrative that this tax plan will hurt them, MacArthur said. It will be damaging to have those messages out there for weeks, he said.

“There’s no one way to skin this cat,” MacArthur said. “But they have to preserve deductibility of state and local taxes in some form.”

To contact the reporters on this story: Laura Davison in Washington at lDavison@bna.com; Kaustuv Basu in Washington at kbasu@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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