Congressional Republicans are considering keeping the state and local tax deduction in some form as part of the party’s tax overhaul to avoid losing votes of lawmakers from California and other states that have large numbers of residents who use the break.
The tax plan unveiled by President Trump and key Republicans last week proposed to scrap the deduction. That would help offset the plan’s business and individual tax cuts by generating about $1.3 trillion in additional federal revenue over the next decade.
Rep. John Faso (R-N.Y.) said Tuesday that lawmakers from states like his own that would be hit hard by the loss off the deduction are raising concerns with House Republican leaders.
“They’re cognizant of our concern, and there’s a lot more discussion that needs to take place,” Faso said. “There are a lot of ways to address this. We want the leadership and the tax writers to consider alternatives that will treat everyone fairly.”
At a dinner Monday night, some House Republicans discussed the state and local tax deduction with Rep. Kevin Brady (R-Texas), one of the architects of the tax plan, according to his spokeswoman Emily Schillinger.
The tax-writing Ways and Means Committee, which Brady chairs, is scrambling to turn the tax plan outline into legislation. More than a dozen House Republicans represent districts in California, New York and other high-tax states where residents would be most hurt by eliminating the deduction.
Losing their votes could endanger passage of a tax bill.
“We are focused on delivering tax relief for all Americans across the country, regardless of what state they live in,” Brady told reporters on Monday. “That won’t be determined until the final details of the tax reform plan are put in place.
“In the meantime, we are working with them, listening very closely to all our lawmakers, Republicans and Democrats alike, who are in high-tax states,” he said.
Republicans are considering limiting the deduction, either by capping it for high-income earners or giving taxpayers a choice of using the break for property taxes or mortgage interest. The tax plan keeps the mortgage interest deduction.
Retaining a limited state and local tax deduction would cause the tax proposal to add even more to the federal budget deficit unless other changes are made.
The plan, which still lacks many key details, would increase the federal budget deficit by $2.4 trillion over the first decade, according to the nonpartisan Tax Policy Center.
Rep. Dave Reichert (R-Wash.), a member of the Ways & Means Committee, said all options were still on the table.
“It’s a concern for every state -- some more pronounced than other states,” he said of the state and local tax deduction. “What we don’t want to do is create a system where you have huge winners and losers across the country.”
Californians benefit more from the state and local tax deduction than taxpayers in any other state.
The provision allowed California residents to reduce their taxable income by $101 billion in 2014, according to the nonpartisan Tax Foundation. That was one-fifth of the total value of the deduction nationwide.
New York, New Jersey and Illinois were next on the list. Of the top 10 states for the deduction, Trump carried only three in last fall’s election.
Republicans have said the deduction largely affects the wealthy and is unfair to residents in lower-tax states. Eliminating the break would help simplify the tax code and make it more equitable, White House officials said.
“By creating simplification we were trying to get rid of all the loopholes and all of the deductions that mostly wealthy people use,” Gary Cohn, the top White House economic advisor, told Bloomberg TV on Friday.
“When you lower the rate but get rid of that deduction for many American taxpayers they actually end up in a better place,” Cohn said.
But he indicated the Trump administration was open to negotiation on the deduction, saying that would not cross a “red line.” The White House has said it would not negotiate its proposal to reduce the corporate tax rate to 20% and the top rate on so-called pass-through businesses to 25%.