GOP look­ing to kill a pop­u­lar blue-state de­duc­tion in tax over­haul plan

But SALT has sup­port of law­mak­ers in high-tax states

The Washington Post Sunday - - POLITICS & THE NATION - BY MIKE DEBO­NIS mike.debo­nis@wash­

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 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 that the SALT de­duc­tion 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 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 SALT de­duc­tions. He 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 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 de­duc­tion.

Last year, the con­gres­sional Joint Com­mit­tee on Taxation es­ti­mated the de­duc­tion’s cost to the Trea­sury at more than $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, em­ploy­er­paid 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 “pay­fors” to off­set the GOP’s rate cuts, in­clud­ing a “bor­der ad­just­ment” tax on cor­po­rate ex­penses. That pro­posal, fa­vored by House Speaker Paul D. Ryan (R-Wis.), might have raised a tril­lion dol­lars over 10 years but gen­er­ated fierce op­po­si­tion from some busi­nesses.

Ryan, who is eye­ing the SALT de­duc­tion, made the con­ser­va­tive pol­icy case for elim­i­nat­ing it 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 a hand­ful of Repub­li­cans, mainly in the House, are threat­en­ing a re­volt if the GOP tax plan is bal­anced on their con­stituents.

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

“These peo­ple have 60-by-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.”

King and MacArthur doubt that the Repub­li­can 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 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 this month and ex­am­ine how it would af­fect their con­stituents.

Ryan sug­gested that “there are ways of ame­lio­rat­ing the ef­fects” of elim­i­nat­ing the SALT de­duc­tion, point­ing 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 also are propos­ing to elim­i­nate the al­ter­na­tive min­i­mum tax, he noted, which tends to af­fect a sim­i­lar pop­u­la­tion as those who claim SALT de­duc­tions.

Not all leg­is­la­tors from high­tax states are op­posed to rolling back the SALT de­duc­tion; a few be­lieve it could send a needed mes­sage to free-spend­ing leg­is­la­tors in state­houses and city halls.

“The ques­tion is: Should tax­pay­ers in low-tax states be sub­si­diz­ing the tax­pay­ers in high-tax states?” said Sen. Pa­trick J. Toomey (R-Pa.), a mem­ber of the tax-writ­ing Senate Fi­nance Com­mit­tee. “It’s not clear to me why that’s good pol­icy.”

Steven M. Rosen­thal, a se­nior fel­low at the lib­eral-lean­ing Tax Pol­icy Cen­ter who op­poses elim­i­nat­ing the SALT de­duc­tion, said it would es­sen­tially raise the cost of state taxes and thus in­crease pres­sure on of­fi­cials to cut them — at a time when Washington is trans­fer­ring more costs, es­pe­cially health care, to the states.

“They’re shift­ing the ex­pense and kick­ing them when they’re down, mak­ing it harder for them to raise the rev­enue for these new fed­eral man­dates,” he said.

But Rosen­thal said Repub­li­cans, hav­ing ruled out higher taxes on as­sets and in­vest­ment, have few eas­ier choices avail­able to them.

“I think it will have bet­ter legs this time,” he said. “Repub­li­cans need to close a few loop­holes and need to hit the rich in some way in or­der for the pack­age to ex­tend the nar­ra­tive that it’s not just a wind­fall for the rich. And the nois­ier the blue-state politicians are at ob­ject­ing to these loop­holes, the bet­ter it plays into the nar­ra­tive.”

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