State and Local Tax Deduction May Be Road Block to Tax Reform

Republicans from high-tax, Democrat states may create a roadblock in tax reform through their opposition to the repeal of the state and local tax (SALT) deduction as Republicans remain desperate to pass a significant piece of legislation before the 2018 midterm elections.

The House passed the Senate version of Republicans’ budget resolution on Thursday that will pave the way for the Republicans to pass a tax reform package. The budget passed narrowly through the House 216-212, featuring unanimous Democrat opposition and 20 Republican votes against it.

The House will now work on passing a ten-year, $1.5 trillion tax reform package that features massive tax cuts for small businesses and middle-class families. The Republican tax platform would lower the tax brackets to rates of 12, 25, and 35 percent and double the standard deduction for the average American. The Republican tax plan will also eliminate the state and local tax deduction, which allows for high-tax, mostly Democrat states such as New Jersey, California, and New York to deduct their high taxes from their federal income taxes.

Republicans such as Reps. Tom MacArthur (R-NJ), Peter King (R-NY), and Lee Zeldin (R-NY) voted against the measure. These Republicans argue that eliminating the local deduction might hurt middle-class families.

Nicole Kaeding, an economist with the Tax Foundation, argues that the SALT deduction mostly favors wealthy Americans in high tax states. Kaeding explains that only 28 percent of Americans take the SALT deduction and that almost 90 percent of those Americans that use the SALT deduction have incomes over $100,000. Kaeding said, “The deduction favors high-income individuals who are concentrated in high-tax states. Six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of the deduction.”

Kaeding added, “Repealing SALT is not happening in a vacuum. It is offsetting revenues needed to finance other tax cuts.”

Despite the economics behind the debate, the politics remain dire for Republicans desperate to pass a significant legislative victory before the 2018 midterms. The House passed the budget resolution by only four votes; Republican leadership should not take their criticism lightly or they may fail with tax reform as GOP leadership did with Obamacare repeal.

In a statement regarding his opposition to the budget resolution, Rep. MacArthur said, “For weeks, Congressman MacArthur has been urging Leadership and the Administration to save the SALT deduction for middle-class New Jerseyans,” adding, “Unfortunately, a concrete deal had not been reached before this vote. The Congressman will continue to work constructively with anyone to find a solution that will provide tax relief for New Jersey.”

Congressman Chris Smith (R-NJ), explained:

In New Jersey we already pay one of the highest shares of federal income taxes among states, yet we see the lowest return on our investment from the federal government. According to some estimates, my state receives only 74 cents back in federal spending for every dollar we send to Uncle Sam in federal taxes. The elimination of this deduction would further exacerbate this disparity and in essence represents double taxation for residents of New Jersey.

Rep. Pete King (R-NY) said:

While I strongly believe our tax code needs to be reformed and simplified, everything must be done to ensure property tax and state income tax deductions are preserved. No one should be taxed again on money you have already been taxed on at the state level. These tax deductions have been in place since 1913 and have ensured the taxpayer would not be burdened by a double tax. Almost half of my constituents benefit from the SALT tax deduction, and taking away these deductions would be crippling to New Yorkers, especially those on Long Island. A great majority of Long Islanders are homeowners and their home is their main asset, nothing should ever be done to make home ownership more difficult in an already extremely expensive market.

Despite their protestations, House Ways and Means chairman Kevin Brady (R-TX) believes that Republicans can strike a deal on the SALT deduction before lawmakers will reportedly unveil the tax reform legislation next week.

“Our lawmakers in these high tax states need to ensure that their families are better off from tax reform than before. We are working very seriously with them to find good solutions. I’m confident we can, and when we do, we’ll incorporate that into the tax reform bill. I’m convinced we can do this in a way that’s fair, that helps grow their economies in a significant way, and allows us to do the middle-class tax relief that we’re all focused on,” Brady said at a press conference on Thursday.