Why a GOP tax proposal could be bad news for your clients

A key tax reform would do away with the federal deduction for state and local taxes, a move that would especially hurt taxpayers in high property tax states like New York, New Jersey and California

Apr 18, 2017 @ 12:34 pm

By Bloomberg News

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Conservative activists and House Republican leaders want to eliminate a trillion-dollar tax break that mostly benefits wealthy filers in Democratic states, a push that could further imperil President Donald J. Trump's hopes of winning bipartisan support for a tax overhaul.

Ever since the inception of the federal income tax in 1913, taxpayers have been allowed to deduct the state and local income taxes they pay from their taxable income. Anti-tax crusaders, including Grover Norquist, the president of Americans for Tax Reform, say the deduction represents bad policy.

"When you allow people to deduct their state and local taxes against the federal tax, you in effect subsidize tax increases at the state and local level," Mr. Norquist said an interview. "The way to solve that is to get rid of the deduction. It's good tax policy. It's good tax reform."

The deduction is a rare tax break for high earners that conservatives want to abolish and Democrats want to protect, a dynamic that scrambles the traditional partisan divide.

"Republicans don't like the idea of subsidizing state and local governments," said Roberton Williams, an economist with the nonpartisan Tax Policy Center. "This is transferring money from low-tax states to high-tax states. So this doesn't rank high on the list of deductions and preferences they like. The flipside of that is Democrats like the idea of states having more funds."

Mr. Trump hasn't taken a public position on the issue, and White House spokeswoman Natalie Strom declined to comment on his thinking. "He's continuing to hear input from all sides" on a potential tax plan, she said, describing it as a high priority.

Mr. Williams said the president, a wealthy New Yorker, has "almost certainly" benefited from the tax break in the past; Ms. Strom also declined to comment on that.

Ditching the deduction would raise federal tax revenue by $1.3 trillion over 10 years, according to the Tax Policy Center, which found that 90% of that increase would be paid by taxpayers who earn $100,000 or more.

The largest beneficiaries of the tax break are California, New York and New Jersey, all relatively high-tax blue states, which eat up more than a third of the nationwide benefits, according to the nonpartisan Committee for a Responsible Federal Budget.

"Blue state, red state, it doesn't matter to us. It's still bad policy," said Andy Roth, a lobbyist for Club for Growth, a conservative pressure group. "The state and local tax deduction is just a subsidy for government to tax and spend more money." The Heritage Foundation, a right-leaning research and advocacy group, urged Congress in a recent report to "repeal the deduction and use the revenue gained to reduce federal marginal tax rates."

RYAN'S BLUEPRINT

House Speaker Paul Ryan has proposed to do just that. The blueprint for tax reform that he introduced last summer — which has drawn most notice because it proposes a controversial border-adjusted tax — would kill the deduction.

Yet the intraparty politics surrounding the issue could be tricky. In the House, 28 Republicans represent New York, California and New Jersey combined, and the GOP can only afford to lose about 20 of its own members to pass a bill without Democratic support.

"You're going to see Republican members in those states fighting to keep those deductions," said Rep. Chris Collins, a New York Republican. The state and local tax break is "big for New Jersey, New York, California," he said.

"Any proposal to eliminate or scale back the state and local deduction would result in a significant tax increase on middle-class Americans," said Matt House, a spokesman for Sen. Chuck Schumer of New York, the Democratic leader. "Senator Schumer will vigorously fight this proposal."

Trump has refused to release his own tax returns, a departure from four decades of precedent. Keeping them a secret could complicate tax-reform legislation,Mr. Schumer told reporters last week. "He just has an obligation to come clean," Mr. Schumer said. "When you clean up the swamp, it's not keeping things secret."

Shortly before he took office in January, Mr. Trump met with New York Gov. Andrew Cuomo, a Democrat, and discussed taxes. Mr. Cuomo told reporters he conveyed to Mr. Trump that ending the state and local tax deduction "would be devastating for the state of New York" and others.

The prospect may be moot if Republicans decide not to offset the cost of their tax plan. While Mr. Ryan remains committed to a permanent overhaul, which would likely have to be revenue-neutral, several top GOP senators have floated a straight tax cut that would automatically expire after 10 years.

Scrapping the state and local tax break would be "as much a punishment of blue states as it is simplifying the tax code," said Stan Collender, a fiscal policy expert and former congressional Democratic budget aide. "It tends to hurt states with blue governors and high tax rates, and probably didn't vote for [Mr.]Trump and isn't likely to vote for a Republican presidential candidate anytime soon."

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