To make tax plan work, GOP eyes blue-state break

The Mercury News - - Other Views - By Mike DeBo­nis

As long as there has been a fed­eral in­come tax, tax­pay­ers have been able to deduct most of the state and lo­cal taxes they pay from earn­ings sub­ject to Un­cle Sam’s grasp. But that de­duc­tion — es­pe­cially pop­u­lar in states rich in Demo­cratic vot­ers — could dis­ap­pear as soon as next year if Pres­i­dent Don­ald Trump and con­gres­sional Repub­li­cans suc­ceed in their promised re­write of the tax code.

The state-and-lo­cal-tax de­duc­tion, or SALT, has long been a tar­get for tax pol­icy wonks who see it as an un­wise fed­eral sub­sidy that is mainly claimed by the wealthy. But pol­i­tics have al­ways in­ter­vened: Thanks to the op­po­si­tion of law­mak­ers in high-tax states, the de­duc­tion has sur­vived ev­ery ef­fort to clear out loop­holes, in­clud­ing the last fed­eral tax over­haul of sim­i­lar am­bi­tion in 1986.

Now, Repub­li­can lead­ers have made clear the SALT is on the ta­ble, and it has shaken up a num­ber of blue-state GOP leg­is­la­tors who are warning that it could de­rail the am­bi­tious tax plan Trump is now push­ing.

“I intend to fight it with ev­ery­thing I know how,” said Rep. Tom MacArthur, R-N.J., who rep­re­sents a dis­trict where 43 per­cent of tax fil­ers claim the SALT and signed a bi­par­ti­san let­ter to Trea­sury Sec­re­tary Steven Mnuchin urg­ing him to pre­serve the break. “It’s a big deal for states like ours.”

The in­cen­tives to elim­i­nate, or at least chip away, at the de­duc­tion could be im­pos­si­ble for con­gres­sional tax writ­ers to ig­nore. Repub­li­cans are hop­ing to drive down both in­di­vid­ual and cor­po­rate tax rates us­ing spe­cial con­gres­sional pro­ce­dures that will re­quire their plan to not in­crease the deficit in the long term. Do­ing so means off­set­ting the costs of rate cuts by clos­ing loop­holes, and few of them yield more rev­enue than the SALT.

Last year, the con­gres­sional Joint Com­mit­tee on Tax­a­tion es­ti­mated its cost to the Trea­sury at $368 bil­lion through 2020, and the Con­gres­sional Bud­get Of­fice re­ported that sim­ply cap­ping the de­duc­tion would cut deficits by $955 bil­lion over a decade.

The other in­di­vid­ual tax pro­vi­sions whose elim­i­na­tion could gen­er­ate close to that rev­enue are even more po­lit­i­cally sa­cred — in­clud­ing the fa­vored treat­ment for re­tire­ment sav­ings, em­ployer-paid health care pre­mi­ums, in­vest­ment in­come and mort­gage in­ter­est.

“It’s re­ally hard to en­vi­sion tax re­form that’s worth writ­ing home about, that’s done rev­enue-neu­trally, with­out in­clud­ing this,” said Ryan El­lis, a con­ser­va­tive tax lob­by­ist. “It’s very, very dif­fi­cult to en­vi­sion how you would piece it to­gether. We’ve taken so many hits on ev­ery­thing else.”

That is a ref­er­ence to the demise of other po­ten­tial “pay-fors” to off­set the GOP’s rate cuts, in­clud­ing a “bor­der ad­just­ment” tax on cor­po­rate ex­penses. That pro­posal, fa­vored by House Speaker Paul Ryan, R-Wis., might have raised a tril­lion dol­lars over 10 years but gen­er­ated fierce op­po­si­tion from some busi­nesses.

Now Ryan, who is eye­ing the SALT, has made the con­ser­va­tive pol­icy case for elim­i­nat­ing the de­duc­tion at a Sept. 7 event hosted by The New York Times.

“Peo­ple in states that have bal­anced bud­gets, whose state gov­ern­ments have done their job and kept their books bal­anced and don’t have big mas­sive pen­sion li­a­bil­i­ties, they’re ef­fec­tively pay­ing for states that don’t,” he said. “What it is is a fair­ness is­sue. … Let’s let peo­ple see their true cost of gov­ern­ment.”

The de­duc­tion clearly fa­vors states where taxes are rel­a­tively high, and where in­comes are high enough that it is worth­while for tax­pay­ers to item­ize their de­duc­tions and claim it. Ac­cord­ing to the con­ser­va­tive Tax Foun­da­tion, fil­ers in six states — Cal­i­for­nia, New York, New Jersey, Illi­nois, Texas, and Penn­syl­va­nia — claim more than half of the dol­lar value of the de­duc­tion.

With the ex­cep­tion of Texas, those states are over­whelm­ingly rep­re­sented by Democrats, but the hand­ful of Repub­li­cans, mainly in the House, are threat­en­ing a re­volt if the GOP tax plan is bal­anced on their con­stituents.

Rep. Peter King, R-N.Y., who rep­re­sents a mid­dle­class Long Is­land dis­trict, said he could never vote for a tax bill that elim­i­nated the de­duc­tion, es­pe­cially for prop­erty taxes.

“These peo­ple have 60by-100 [foot] plots, they’re pay­ing about $15,000 a year in prop­erty taxes, high state in­come taxes, not into Wall Street, not into stocks and bonds,” he said. “It would be dev­as­tat­ing. These are Trump vot­ers. They didn’t vote for him to take away the de­duc­tion on their main as­set.”

Both King and MacArthur doubted the GOP bill would be able to reduce rates enough to off­set the cost of los­ing the de­duc­tion. And even if it did, they said, that would hardly suf­fice: “They may leave my res­i­dents at a break-even while the rest of the coun­try en­joys tax breaks,” MacArthur said. “That’s not fair.”

In­ter­views with a broader group of House Repub­li­cans rep­re­sent­ing dis­tricts in Cal­i­for­nia, Penn­syl­va­nia, Illi­nois and New York found broad un­ease with the prospect of the de­duc­tion’s elim­i­na­tion. But all of them said they would see what would emerge from the “Big Six” ne­go­tia­tors from the White House and Capi­tol Hill, who are ex­pected to re­lease an out­line later this month and ex­am­ine how it would af­fect their con­stituents.

Ryan sug­gested “there are ways of ame­lio­rat­ing the ef­fects” of elim­i­nat­ing the SALT, and pointed specif­i­cally to plans for dou­bling the standard de­duc­tion avail­able to tax­pay­ers who do not item­ize. Do that, he said, and “you take care of mid­dle-in­come peo­ple for that tax break, and it’s re­ally a high-end, wealthy per­son’s tax break.”

El­lis said there are other ways tax writ­ers could choose to scale back the de­duc­tion with­out in­flict­ing too much po­lit­i­cal pain: By sim­ply cap­ping it, for in­stance, or by im­ple­ment­ing a broader lim­i­ta­tion on item­ized de­duc­tions for high-in­come earn­ers. Repub­li­cans are also propos­ing to elim­i­nate the Al­ter­na­tive Min­i­mum Tax, he noted, which tends to af­fect a sim­i­lar pop­u­la­tion that claims the SALT.

Not all leg­is­la­tors from high-tax states are op­posed to rolling back the SALT; a few be­lieve it could send a needed mes­sage to freespend­ing leg­is­la­tors in state houses and city halls.

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