Politico

GOP lawmakers may be close to compromise on state, local tax deduction

Written by Lisa

House Republicans are moving closer to keeping some form of the state and local tax deduction, and President Donald Trump isn’t standing in the way, signaling a possible breakthrough in an early spat over tax reform.

Several lawmakers who huddled with GOP leaders Thursday indicated that the talks were going well.

“They’re trending towards a solution,” said Rep. Tom Reed (R-N.Y.), a member of the tax-writing Ways and Means Committee. “I think there’s a good-faith position by all the members involved to try to come up with something that works for everybody.”

Legislators from high-tax states and districts are loath to let the century-old deduction — targeted for elimination by Hill GOP leaders and the White House — slip away. They’re trying to sway leadership to leave it alone or limit it to a degree so voters back home — particularly those in the middle class — don’t see their overall tax bills increase because of tax reform.

Recent discussions have involved capping the deduction on those with incomes somewhere between $200,000 to $400,000, meaning taxpayers earning less than that could still capture the benefit, according to a source with close ties to the Trump administration. White House officials are tangentially involved but letting the tax committees on Capitol Hill take the lead, the source said.

The solution could also include gradually phasing out the deduction based on income level.

The bottom line is to avoid hitting middle-income earners but still raise some revenue by altering the current deduction on state and local taxes, a senior administration official said.

Scaling back the deduction by restricting its use by top-income taxpayers wouldn’t generate as much savings that lawmakers plan to put toward tax cuts, compared to outright repeal. Applying a ceiling of $400,000 in adjusted gross income, for example, would raise $481 billion in revenue over a decade, while full repeal would raise about $1.8 trillion, according to a Tax Foundation analysis.

But congressional Republican leaders need to ensure there are enough votes for their broader tax agenda.

They’re also mindful of the perception that the tax cuts they want would primarily benefit upper-income Americans, as is the president. Trump has been traveling the country to try to keep tax reform from getting painted as a giveaway to the rich on the backs of middle- and lower-income households.

Staff from Trump’s National Economic Council have said the deduction artificially props up home values, which they don’t think is right, according to a lobbyist who’s met with them on the issue. Administration officials and congressional leaders also argue that it primarily benefits upper-income taxpayers and subsidizes high state and local taxes.

Still, Trump hasn’t dug a line in the sand over the state and local tax issue, according to the senior administration official, and the joint framework Trump agreed to with congressional leaders is meant to inform discussions as lawmakers work on formal legislation, a White House spokesperson said.

“To a large degree, these decisions are now in the hands of Congress to figure out what they can pass to deliver relief to the American middle class,” the spokesperson said.

Across the Capitol, Senate Finance Chairman Orrin Hatch (R-Utah) said recently that he’d like to keep the state and local tax deduction. A deal is expected and there’s no sense that the issue will imperil the wider-ranging tax reform efforts, said the source closely tied to the administration.

Thursday’s meeting, the latest in a series on the issue, included House Majority Leader Kevin McCarthy, Ways and Means Chairman Kevin Brady (R-Texas), House Majority Whip Steve Scalise (R-La.) and Deputy Whip Patrick McHenry (R-N.C.).

They’re making progress, Brady said after exiting the meeting.

“We’re all focused on how we make sure the middle-class taxpayers are better off after tax reform and that we recognize the burden of those taxes in those high-tax states,” Brady said.

The decision won’t be revealed until a tax bill gets introduced, he said. Brady has said to expect tax legislation “very soon” after the House and Senate budgets get merged.

Lawmakers from New Jersey and New York, in particular, have argued that their constituents contribute a greater share of federal tax revenue but get less back than those from lower-tax areas. In contrast, those from low-tax districts have said the tax benefit supplies incentives for profligate state and local spending.

The who’s-subsidizing-whom argument has also riled up House Democrats from high-tax areas, which include Illinois, Massachusetts and California. House Minority Leader Nancy Pelosi said Thursday they oppose the deduction’s outright elimination as well as any limits under discussion.

A number of proposals remain possible, said Rep. Tom MacArthur (R-N.J.), who’s said he’s open to a ceiling on who would qualify for the deduction.

“I’m not sure which is going to carry the day,” said MacArthur, but all of them move in a better direction than wholly eliminating the deduction.

MacArthur has floated combining the deduction for property taxes with the deduction for mortgage interest. Reed has proposed a credit for state and local sales taxes. Another proposal would let taxpayers choose to deduct their mortgage interest or their state and local sales taxes, but not both.

“We may not be able to get there 100 percent, but getting to a victory that’s 80 percent of the loaf I think is where most people want to get to,” Reed said.

Nancy Cook and Ben White contributed to this report.

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