There are any number of provisions that could bring down the far-reaching Republican tax plan between now and when the House and Senate hope to vote on the legislation later this fall.
But one proposal in particular has quickly become a political land mine for the GOP, and whether it makes it into the final bill could determine if the legislation passes or fails and whether millions of Americans in several of the nation’s largest states see a tax cut or a tax increase as a result. To offset the enormous cost of reducing tax rates for the wealthy and businesses, top Republicans want to prohibit people from deducting their state and local taxes from their federal bill.
This would be a windfall for the government: $1.4 trillion in revenue over a decade, according to one estimate from a conservative think tank. But it would hit hardest middle-income Americans in the highest-tax states of California, New York, Illinois, and New Jersey. Those all happen to be Democratic states, which have become a frequent target for the Republicans who control Congress. But they still present a legislative math problem for House leaders, who must rely on votes from the 35 GOP representatives from those states to cobble together a majority of 218 for passage of the tax bill. And the provision casts serious doubt on a crucial talking point for President Trump and congressional Republicans: that their plan would reduce taxes at all levels and benefit the middle class—and not the wealthy—the most.
“From what I can see, it would definitely hurt most of my constituents,” Representative Peter King of New York told me. The Long Island Republican has taken a firm position opposing elimination of the state-and-local deduction, sometimes referred to by the acronym SALT. And he’s helped mobilize lawmakers from the Northeast who don’t want their constituents to shoulder the burden so that the rest of the country can get a tax cut.
“The cost of living is higher in the Northeast. That’s just a fact,” said Republican Representative Tom MacArthur of New Jersey, who brokered a compromise in the House on health care earlier this year but is now fighting the leadership on taxes. “It’s not some choice of people in the Northeast, and to tax them on dollars they no longer have, because they’ve paid it to their state and to their local community, is patently unfair.”
The battle over the state and local deduction epitomizes the quandary facing GOP leaders on tax reform. To fulfill their goal of simplifying the tax code and lowering rates, they must raise revenue elsewhere by eliminating loopholes and deductions—most of which are well established and popular to constituencies large and small. House Speaker Paul Ryan has already lost out on his proposal for a border-adjustment tax, which would have raised about $1 trillion over 10 years but was opposed by conservatives. And the party is trying to protect the deductions for charitable giving and mortgage interest. The state and local deduction is the biggest and most lucrative one remaining.
It’s an accepted truth among Republicans that any attempt at broad-based reform will face intense lobbying from business interests trying to protect provisions in the complicated code that benefit them. But the state and local deduction is different because it lowers taxes not for a specific industry, but for the populations of entire cities and states—or at least those who itemize their taxes rather than take the standard deduction.
The argument against allowing people to deduct state and local taxes off their federal bill is that the policy acts as a subsidy for those states. “I don't think it's fair that a bunch of other states are subsidizing New York and California,” Treasury Secretary Steven Mnuchin said Sunday on ABC’s “This Week,” while noting that he’s “sympathetic” to the concerns of local officials.
Ryan and other GOP leaders have urged rank-and-file lawmakers to steel themselves for the lobbying deluge, and to resist critics who would stand in the way of what they’ve called “once-in-a-generation” tax reform. A sizable number of Republicans want the party to sidestep the less popular aspects of reform and stick to tax cuts, which would probably be easier to pass politically. But that would mean increasing the deficit much more than Republicans already plan to do, which could run afoul of the Senate’s current budget rules and its remaining GOP fiscal hawks.
“The big question first will be: Will Congress have the intestinal fortitude to actually do the base-broadening?” asked Senator Bob Corker, the Tennessee Republican who announced last week that he will retire at the end of his term next year. “Will we have the ability to look people in the eye and say, ‘No, we’re cutting out that loophole because we want to get rates low’? That’ll be the first test.”
While Republicans like Senator Ted Cruz of Texas have said the party should be “unapologetic” about cutting taxes even if it means adding to the deficit, Corker has drawn a much harder line. “With realistic growth projections, it cannot produce a deficit,” he told reporters last week. “There’s no way in hell I’m voting for that.”
Corker added: “There may be some people that are stepping away from fiscal sanity, but there are many of us that will not.”
Do Republicans sacrifice the deficit by keeping the state and local deduction? Or do they forge ahead with eliminating it, risking the votes of dozens of members from blue states and potentially the entire bill?
So far, they appear divided. While the deduction is not mentioned specifically in the framework unveiled last week, Representative Kevin Brady of Texas, chairman of the House Ways and Means Committee, told reporters that the current plan was to get rid of it. However, Brady’s counterpart on the Senate Finance Committee, Chairman Orrin Hatch of Utah, separately told reporters he hoped to keep it.
In private meetings, House leaders are urging Republicans from Northeast states to “keep an open mind” about the proposal. They’ve argued that plans to nearly double the standard deduction, from $12,700 to $24,000 for a married couple, would offset the loss of the state and local deduction. That appeared to have won over Representative Chris Collins of New York, who said that the vast majority of people would therefore take the standard deduction instead of itemizing and that those who might be worse off would be people paying steep property taxes on “million-dollar homes.” But local tax officials and budget experts who have crunched the numbers say many more people could see a net tax hike, including those in the middle class. A preliminary analysis from the Tax Policy Center found that nearly 30 percent of people earning between $50,000 and $150,000 a year would see their tax go up in the next decade. And in an interview Thursday morning on ABC News, Trump economic adviser Gary Cohn pointedly could not guarantee that no middle-class families would see a tax increase. “There’s an exception to every rule,” he said.
King pointed out that in addition to scrapping the state and local tax deduction, GOP leaders were also going to eliminate the personal exemption, which would be an added hit to his constituents. Brady hinted to reporters that the party was working with lawmakers from New York, California, New Jersey, and Illinois on a compromise to ensure everyone gets a tax cut “regardless of where they live.”
But King, for one, was skeptical. “Honestly, I don’t see what they could come up with that would compensate for that,” he told me. While the majority of GOP leaders represent lower-tax states, the Long Islander hopes to find more sympathetic ears in the White House, where not only the president but also his top economic advisers, Cohn and Mnuchin, hail from New York. King grinned. “We might have to divide and conquer,” he said.