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Trump reconsiders plan to eliminate deduction for state, local taxes

But keeping the deduction means losing the $1.3 trillion in revenue its repeal was expected to produce

Oct 12, 2017 @ 11:05 am

By Bloomberg News

Months after the White House proposed ending a tax break for people in high-tax states, President Donald J. Trump grew angry when he learned that the change would hurt some middle-income taxpayers, according to two people familiar with his thinking.

Trump's concerns led him to say this week that "we'll be adjusting" the tax-overhaul framework, the people said. But it's not 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 on Wednesday night declined to comment 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 Mr. 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, a Republican who represents Long Island. "Right now, they can't get there without us."

The numbers are daunting for Trump: Roughly two dozen House Republicans are concerned about eliminating the deduction — and he can't afford to lose too many more votes than that in the House. Concerned lawmakers are scheduled to meet Thursday with the House's chief tax writer, Ways and Means Chairman Kevin Brady, to discuss the issue. Many come from the high-tax states that would be hardest hit, including New York and New Jersey.

On Wednesday, Mr. King floated the idea of limiting the use of the deduction to people with incomes less than $400,000 — a cap that that has drawn some support, including from New Jersey's Tom MacArthur. Mr. MacArthur was one of the key Republicans who forged a compromise in the House over a bill to repeal Obamacare. That effort ended last month when the Senate failed to vote on its own repeal-and-replace legislation.

'Not Fair'

Mr. MacArthur said he's taken his concerns to House leaders and the White House "because I think it's important that everyone involved understands — you can't gloss over this, this is a big issue, and we can't do tax reform on the backs of six or seven states. It's just not fair."

House Speaker Paul Ryan defended the repeal of state and local tax deductions at an event in Washington last week, criticizing the break for "propping up profligate big government states."

"People are going to be better off no matter what state you come from," Mr. Ryan said, citing the tax plan's call to double the standard deduction and increase the child tax credit.

The White House first proposed ending the so-called SALT deduction in April, in a one-page outline of the president's tax goals. Its repeal is estimated to generate about $1.3 trillion over 10 years, making it an important way to help pay for the business and individual tax-rate cuts Mr. Trump and congressional leaders propose.

It's not clear why the president didn't know the implications of the SALT deduction for middle-class taxpayers when the plan was released.

Rep. Chris Collins, a New York Republican who's close to Mr. Trump, said he thought the president has been more focused on cutting taxes for corporations and pass-through businesses to stimulate the economy. "And he's left it to others for the details of how we get there" and "how we pay for it," Mr. Collins said.

Deficit Concerns

Many conservatives argue that the tax break should be abolished because it subsidizes state and local governments that tax their citizens heavily — a view Mr. Trump echoed during an interview that Fox News aired Wednesday night.

"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, Gary Cohn, Trump's top economic adviser, has said the White House is open to negotiation on the state and local tax deduction.

Amending the provision would increase the chances that a tax bill would raise the federal deficit — endangering the legislation's support among some lawmakers or limiting the size and duration of its cuts.

In the White House, Trump's point person on tax policy, Shahira Knight, met Wednesday with representatives of groups that want to preserve the tax break, including the National Association of Realtors. But earlier in the day, Kevin Hassett, one of the president's top economic advisers, said the administration still expects to see a tax bill with permanent rate cuts and no deduction for state and local taxes.

The state and local tax deduction primarily benefits high-income people in high-tax states, including New York, New Jersey and California. But about 10% 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 SALT deductions claimed that year.

(More: Trump may tout $4,000 worker benefit in tax plan)

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