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The state and local tax deduction cap probably isn’t going away — despite Trump’s comments

The state and local tax deduction cap probably isn’t going away — despite Trump’s comments
New York Gov. Andrew Cuomo has described the cap on state and local tax deductions as “an economic civil war that helps red states at the expense of blue states.” (Hans Pennink / Associated Press)

President Trump again indicated this week he might be open to revisiting the controversial new limit on state and local tax deductions that hits many middle-income residents hard in California and other high-tax, Democratic states.

Even so, don’t count on any changes to the Republican tax bill that went into effect last year happening any time soon.

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Legislative and political realities mean the $10,000 cap is unlikely to be scrapped or increased until after the 2020 elections at the earliest.

Although opposition to the cap is widely believed to have helped topple Republican House members in California, New York and New Jersey last November, a key Senate Republican is adamantly opposed to a change. And increasing or eliminating the cap probably won’t help get those seats back.

“The Republicans who might have benefited from that, many of them already lost,” said Kyle Kondik, who analyzes elections at the University of Virginia Center for Politics.

New York Gov. Andrew Cuomo, a Democrat and leader of the fight against the cap, this month called the new tax policy “an economic civil war that helps red states at the expense of blue states.”

Cuomo met with Trump at the White House on Tuesday to discuss the matter.

“I told the president myself today: SALT repeal is hurting us. And if you hurt New York, you’re harming the economic engine of the nation,” Cuomo tweeted afterward.

He told reporters that Trump indicated he was open to making changes, similar to something the president had said last week during a meeting with newspaper reporters.

Judd Deere, deputy White House press secretary, said Trump listened to Cuomo’s concerns.

“The president reiterated the negative impact that high taxes in states like New York have on hardworking families and job creators,” Deere said.

Trump’s top economic advisor, Larry Kudlow, told reporters on Thursday that he would meet with Cuomo and his staff soon to discuss possible solutions.

"They have some ideas to kick around. We might have some ideas to kick around,” Kudlow said. “I want to be deliberately vague, because vague is all we have. We'll see."

Lawmakers and officials from states most affected by the cap are pushing to scrap it after arguing strongly during the debate over the Republican tax bill in 2017 that their residents were being unfairly targeted because they tend to vote for Democrats.

Of the top 10 states for deductions for state and local taxes, known as SALT, Trump carried only three in the 2016 election.

“Capping the SALT deduction was a direct hit on my constituents and my state,” Rep. Mike Thompson, (D-St. Helena), a senior member of the tax-writing House Ways and Means Committee, said this week. “We must have relief in this area, whether it’s changing the cap in some way or something else.”

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But the path to any changes is filled with severe obstacles.

The 2017 tax law slashed the corporate tax rate and reduced personal rates across the board.

Republicans argue the state and local tax deduction is mostly used by the wealthy and is unfair to residents in lower-tax states. Capping the deduction helped simplify the tax code and make it more equitable, they said.

What’s more, the rules adopted by the new House Democratic majority mean they would have to raise hundreds of billions of dollars elsewhere to make up for the tax revenue lost by reinstating the deduction. That would increase Republican opposition.

One key lawmaker, Sen. Charles Grassley (R-Iowa), who chairs the committee that would consider any revision, already has vowed the deduction limit won’t be changed. Grassley told The Times this week that he’s not open to raising or eliminating the cap.

“Everybody but the president that’s bringing this up are the very same people that complained that this tax bill … was something for the very wealthy and they want to turn around and give the 1% of the people that are affected by the state and local tax deduction [the ability to] pay less taxes,” said Grassley, chairman of the Senate Finance Committee, his voice rising in irritation. “It’s intellectually dishonest.”

An analysis by the left-leaning Institute on Taxation and Economic Policy found that nearly two-thirds of the benefit of repealing the cap would go to the top 1% of taxpayers.

But even though the wealthy reap the most benefits, many of the people affected by the new cap in California and other high-cost, high-tax states are middle-income earners.

About 6.1 million California residents filed for the deduction in 2015, reducing their federal taxable income by $18,438 on average, according to the Urban-Brookings Tax Policy Center. Only New York and Connecticut had a higher average deduction.

The tax law hasn’t been as popular as Trump and Republicans had hoped. An NBC News exit poll after last November’s elections found that only 29% of voters said the tax law changes helped them.

More recently, there have been stories about rising anger among taxpayers, many of whom are discovering they may owe money to the IRS or their refunds are smaller than expected because of the various changes, including the elimination of personal exemptions and other deductions, as well as new withholding tables put in place last year.

The limit on state and local tax deductions was highly unpopular in California, New York and New Jersey. In last fall’s elections, Democrats took control of the House in part because they won a combined 14 seats in those states that had been held by Republicans.

The seats included seven in California, including four in the former Republican stronghold of Orange County.

Kondik said anger over the deduction limit probably was a factor in Republican losses of those seats. But Democrats also picked up Republican seats in places where the cap was not a major factor.

And five of the Republican incumbents who lost in California, New York and New Jersey — including Dana Rohrabacher of Costa Mesa — bucked their party and voted against the tax bill because of the state and local tax deduction limit. Kondik said those votes might not have helped.

“If someone is mad about the SALT deduction, they may not care that their own member didn’t vote for it,” he said. “They may just say, ‘Hey, I got screwed over by the Republicans on it. I’m going to vote the other way.”

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Rep. Kevin Brady (R-Texas), a key player in the Republican tax push, still opposes restoring the full deduction and downplayed the party’s election losses.

“I think frankly that the losses on the Republican side would have been much stronger without the tax reform,” he said this week, arguing the tax cuts created a stronger economy that helped keep voter dissatisfaction down.

House Democrats have proposed legislation to fully restore the deduction. But on top of strong opposition from Senate Republicans and Trump, there’s another problem with the bill.

Unlike Republicans, who passed the tax cut legislation even though it was projected to increase the federal budget deficit by $1.5 trillion over a decade, Democrats have a rule that any lost revenue must be offset.

To offset the cost of the bill, all the changes to the individual tax code, including the deduction limit on state and local taxes, expire after 2025. That sets up a future fight over extending the changes, similar to the battle in 2012 over extending the temporary tax cuts put in place by President George W. Bush.

For now, though, the focus is on the state and local tax deduction. And the so-called pay-as-you-go rule means that Democrats must find new revenue to offset the estimated $88-billion annual cost of restoring the deduction.

Sponsors of the legislation want to do that by raising the top individual tax bracket back up to 39.6%, where it stood for years before the Republican tax bill lowered it to 37%. Such a change would increase Republican opposition to addressing the state and local deduction limit.

Raising taxes on the wealthiest Americans has become a new rallying cry of some liberals. They include Sen. Elizabeth Warren (D-Mass.), the 2020 presidential candidate who wants to enact a wealth tax on people with more than $50 million in assets, and freshman Rep. Alexandria Ocasio-Cortez (D-N.Y.), who has floated the idea of a top rate of as much as 70% for income above $10 million.

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