Are Trump, Ryan at Odds Over State Tax Deduction?

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, Kevin Cirilli and Sahil Kapur

House Speaker Paul D. Ryan (R-Wis.) said Oct. 12 that conservatives are as unified as ever on elimination of the federal deduction for taxes paid to state and local governments.

But President Donald Trump may have reservations over ending it.

The Republican tax framework, released Sept. 27, would eliminate many deductions for individuals, including the break for state and local taxes. Eliminating the deduction would generate $1.3 trillion over 10 years to pay for tax cuts in the GOP plan, but Republicans from states with higher taxes have expressed concern it could raise taxes for their constituents. They are trying to convince the House Ways and Means Chairman Kevin Brady (R-Texas) and other GOP leaders to soften the blow of cutting the tax break.

Ryan, however, said he is convinced that when congressional members look at the final tax package as a whole, elimination of that and other deductions, “carve-outs,” and “loopholes” won’t matter as much. Conservatives, he said, understand and support the need to trim the deduction.

“We have everybody rowing in the same boat in the same direction,” Ryan said during an appearance at the Heritage Foundation, a Washington-based conservative think tank. “The general interest is going to have to trump the special interest.”

However, some top Republicans have hinted that wiggle room may exist on the deduction, including White House economic adviser Gary Cohn and Senate Finance Committee Chair Orrin G. Hatch (R-Utah). Cohn and Hatch were among the six people, along with Ryan, Brady, Senate Majority Leader Mitch McConnell (R-Ky.), and Treasury Secretary Steven Mnuchin, to develop the framework.

And President Trump has grown angry over the plan to ax the deduction after learning it would hurt some middle-income taxpayers, two sources familiar with his thinking told Bloomberg.

‘Biggest Obstacle’

Trump’s concerns led him to say this week that “we’ll be adjusting” the tax-overhaul framework, the sources said, but it isn’t clear how he and congressional leaders would make up for the revenue that would be lost without ballooning the deficit or torpedoing support for the plan.

The White House press office declined to comment Oct. 11 on internal deliberations, but released a general statement that said in part: “The president has made it unequivocally clear that a key priority for tax reform is to cut taxes for America’s hardworking middle class families.”

The tax break in question—which allows households to deduct state and local taxes on their federal returns—has emerged as a key flash point in the tax debate, one that could determine whether Trump has enough votes or will fail again on one of his top legislative priorities.

“This is probably the biggest obstacle they have to overcome to get to 218,” the number of votes needed to pass a tax bill in the House, said Rep. Peter King (R-N.Y.). “Right now, they can’t get there without us.”

‘Big-Government States’

Ryan, who said Congress would work through Christmas if needed to get tax reform enacted, said the state and local deduction acts to prop up “profligate, big-government states” that have enacted relatively high tax rates, relying on their taxpayers to take a deduction on their federal filings.

“We’re having states that actually got their act together pay for states that didn’t,” he said.

That’s a view Trump echoed during an interview that Fox News aired Oct. 11.

“It is finally time to say, ‘Make sure your politicians do a good job of running your state,”’ he told interviewer Sean Hannity. Even so, Cohn, Trump’s top economic adviser, has said the White House is open to negotiations on the state and local tax deduction.

State-Specific Hits

A report released Oct. 5 from the New York-based Nelson A. Rockefeller Institute of Government said that elimination of the state and local deduction would hurt states that give more to the federal government than they get back in federal spending.

Taxpayers in Connecticut would be hardest hit by eliminating the deduction, particularly when combined with the state’s negative balance of payments with the federal government, the report said. It’s followed by New Jersey, New York, Massachusetts, Illinois, and California.

Taxpayers in Mississippi and Alabama, which receive greater amounts of federal aid, would take the smallest hit, when their balances of payments are considered. They are followed by New Mexico, Alaska, and Tennessee.

Sen. Chuck Schumer (D-N.Y.) said Oct. 5 that the use of the roughly $1.3 trillion tax break is “deep and wide” and affects many taxpayers in red states such as Utah and Iowa as well as New York and California. He labeled it the “Achilles heel” of the framework.

Republicans Concerned

Roughly two dozen House Republicans are concerned about eliminating the deduction—and Trump can’t afford to lose too many more votes than that in the House.

About 10 percent of tax filers with incomes less than $50,000 claimed the deduction in 2014, according to the Tax Policy Center, a Washington policy group. People who make more than $100,000 a year accounted for about two-thirds of the state and local tax deductions claimed that year.

Ryan said the deduction should be viewed as part of a larger tax overhaul that will benefit all taxpayers by “growing jobs” and prevent companies from moving overseas in search of lower taxes.

“By doubling the standard deduction, lowering people’s tax rates, and increasing the child credit and getting rid of the marriage penalty, people are going to be better off no matter what state you come from,” he said.

To contact the reporter on this story: Kevin Cirilli in Washington at (Bloomberg); Sahil Kapur in Washington at (Bloomberg); and Che Odom in Washington at (Bloomberg BNA).

To contact the editor responsible for this story: John Voskuhl at (Bloomberg) and Jennifer McLoughlin at (Bloomberg BNA).

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State