A key U.S. senator indicated Thursday that the Republican tax bill was all but certain to keep a limited deduction for property taxes — a partial victory, but at the same time, a major loss for Californians.
Like residents of other high-tax states, Californians would benefit from being able to continue to deduct some of the cost of property taxes on their federal returns. The Republican bill headed to a final vote in the Senate this week proposes to eliminate that deduction.
But the bill would still axe the current deduction for state and local income or sales taxes. That is a bigger loss for California, which has the highest top state income tax rate in the nation, but ranks in the bottom third by one measure for property taxes.
Efforts to restore all state and local tax deductions to the legislation in the House and Senate have gone nowhere.
Sen. Susan Collins (R-Maine) told reporters Thursday that she has told party leaders she would not vote for the Senate bill unless it was amended to allow people to deduct as much as $10,000 a year in property taxes from their federal returns.
“They understand that it’s something I have to have in the bill,” Collins said during a breakfast sponsored by the Christian Science Monitor. With Democrats firmly aligned against the tax bill, Republican leaders cannot pass it if more than two of their party’s senators withhold support.
Collins has proposed an amendment restoring the limited property tax deduction. Her amendment could be voted on Thursday, when Republicans are expected to approve the bill.
But the change also could be included after the Senate passes the legislation, when Republicans reconcile differences with the House tax bill.
Collins said she would prefer the bill keep all state and local deductions, most of which have been in the tax code since it was enacted in 1913.
But “politics is the art of the possible,” Collins said. “I’m trying to be a realist.”
The Senate Republican legislation proposed to eliminate all state and local tax deductions — a move that would produce about $1.5 trillion in additional federal revenue over the next decade to help offset the large corporate tax cut and smaller reductions to individual rates.
Allowing a limited property tax deduction would cost about $100 billion over the next decade. Senators would have to make other changes to offset some of that lost revenue or the bill would violate rules that allow Republicans to pass it with only a simple majority vote.
Collins said she’d produce the extra revenue by setting the future corporate tax rate at 21% instead of the proposed 20%, and keeping the top individual tax rate at 39.6% for incomes of $1 million and above for couples filing jointly. The Senate tax bill would reduce the top rate to 38.5% for income above $1 million.
Killing the deductions would hit hard in California and other high-tax, high-income states, many in the Northeast. Pushback by Republican House members from those states led the House to include a $10,000 property tax deduction.
The deal was driven largely by House Republicans from New York and New Jersey, where property taxes make up a larger share of the overall tax burden.
Betty Yee, California’s state controller, has said keeping only a limited property tax deduction was throwing Californians “a bone,” but was not enough.
Californians claimed $70 billion in federal deductions for state and local income taxes in 2014, but only $27 billion in real estate, personal property and other taxes, according to the California Franchise Tax Board.
In 2015, California received the largest percentage of the value of the broader state and local deduction, about 20% of the nationwide total, according to the nonpartisan Tax Foundation.
California also received the largest benefit from the property tax deduction due to the state’s size and high housing costs, but that was only about 15% of the nationwide total, the Tax Foundation said. The state has about 12% of the overall U.S. population.
California ranked behind only New York, New Jersey and Connecticut for the value of the state and local tax deduction as a percentage of adjusted gross income for all state residents in 2015, the Tax Foundation said.
But California was 12th in the value of the property tax deduction alone as a percentage of adjusted gross income.
The top state income tax rate of 13.3% in California was by far the highest in the nation last year. The rate in New York and New Jersey was about 9%.
In an analysis this year of property taxes by personal finance website WalletHub, California tied for the 17th lowest rate. New Jersey had the highest rate.
1:30 p.m.: This article was updated to indicate the property tax change could be made after the Senate passes its bill.
This article originally was published at 11:40 a.m.