GOP overhaul proposals target state and local tax deduction
WASHINGTON — Republican lawmakers are pushing to roll back or eliminate the state and local tax deduction that reduces the amount that millions of Americans owe to Uncle Sam every year.
The lawmakers argue that the current deduction requires filers in states such as Nebraska and Iowa — who generally pay less state and local taxes — to subsidize those in higher-tax areas such as New York, New Jersey and California.
“If New Jersey chooses to have much higher taxes than others, that’s a local choice and we should not make that a federal issue or a national issue,” said Rep. Adrian Smith, R-Neb.
Those defending the deduction say it prevents double taxation and helps local entities provide important services, including public education.
They also say one reason people pay higher taxes in New York, New Jersey and California is that while $500,000 might buy a mansion in the Midwest, it’s barely enough for a starter home in the country’s most expensive areas.
Democrats criticize the move, saying it would burden many middle-income families in order to help pay for GOP priorities such as lowering corporate tax rates, eliminating minimum tax requirements for the wealthy and phasing out the estate tax.
The Senate Republican plan would eliminate the deduction, which is claimed by 30 percent of taxpayers nationwide, according to the Government Finance Officers Association.
Smith is a member of the tax-writing House Ways and Means Committee that approved its bill Thursday. That measure would still allow the deduction of property taxes, though only up to $10,000.
Smith represents the state’s sprawling and largely rural 3rd District, where only one in five tax units claims a state and local tax deduction, with the average being $9,076, according to IRS statistics compiled by the finance officers association.
By comparison, one-third of tax units in the Omaha-based 2nd District claimed the deduction, at an average amount of $12,484.
Their congressman, Republican Rep. Don Bacon, noted that the House proposal still allows property tax deductions up to $10,000 and also doubles the standard deduction, which would soften the blow for some filers. He also criticized areas with higher taxes.
“We don’t feel good about subsidizing the higher tax states out East,” Bacon said.
It’s true that some districts in New York and New Jersey see even higher rates of filers taking the deduction — around half in some areas. And the average deduction can exceed $40,000 in places.
Rep. Jeff Fortenberry, R-Neb., represents the 1st District, which includes Lincoln and parts of Sarpy County. In the 1st District, 29 percent of tax units claimed the deduction, with the average amount being $9,894.
“If a locale decides on its own to keep its taxes higher for their own particular purposes, another locale shouldn’t have to subsidize it,” Fortenberry said.
Richard Kaplan, a professor of law at the University of Illinois at Urbana-Champaign who specializes in tax policy, said eliminating the state and local tax (or SALT) deduction is both part of Republican philosophy — not wanting high-tax locales subsidized — and a way of helping the proposal’s bottom line.
“Because the Senate wants a complete repeal of SALT, they were able to restore the deduction of medical expenses (which the House bill eliminates) and keep mortgage interest deductible on loans up to $1 million (versus $500,000 in the House bill), including second homes, which the House bill drops,” Kaplan noted.
The Urban-Brookings Tax Policy Center calls the SALT deduction one of the largest federal tax expenditures, saying it has an estimated revenue cost of $96 billion in 2017 and $1.3 trillion over the 10 years from 2017 to 2026.
Even with lower or no SALT deduction, the combination of measures in the bills is expected to add at least $1.5 trillion to the deficit over the next 10 years.
The Midlands district with the highest rate of people claiming the deduction is Iowa’s 3rd, which includes Council Bluffs and Des Moines, where 35 percent take it, at an average of $10,460.
Their Republican Rep. David Young said that those crafting the bill are doing the math and that they have to offset some tax breaks with savings elsewhere.
“It’s a matter of trying to find revenue,” Young said. “And that’s a big bucket right there.”
He noted that House members already backed off complete elimination and instead opted for the $10,000 limit. He said the final product may have a different cap or something else altogether.
In Iowa’s 4th District, Republican Rep. Steve King said he has heard little from constituents concerned about losing their SALT deductions. About 25 percent of tax units take the deduction in that district, at an average of $8,863.
“If they have to eliminate those deductions to make this tax plan work, then we just have to bite that bullet and move on,” King said.
During the Ways and Means Committee debate, Democrats offered an amendment that would have cut SALT deductions for businesses as well. “If you’re going to do this revenue grab for millions of working families with the elimination of SALT, let’s also ask the corporations of America to also give up that deduction that they are currently allowed to take,” said Rep. Ron Kind, D-Wis.
The amendment was defeated. Smith opposed it, citing concern for farmers who take the deduction.
“At least in Nebraska the property tax burden placed on agriculture is significant,” Smith said.