Trump Targets Local Tax Write-Off, But May Hit House Republicans

By John McCormickJohn McCormick

The chairman of the U.S. House tax-policy panel may have a tax-policy problem.

Representative Peter Roskam, an Illinois Republican who presides over the Tax Policy Subcommittee, would see his constituents lose about $3.4 billion worth of federal tax deductions annually if Congress backs a particularly sticky part of President Donald Trump’s tax plan.

Trump and his economic advisers have proposed ending the individual federal tax deduction for state and local taxes paid—a write-off with Civil-War era roots that has survived past attempts to kill it. Advocates for Trump’s plan have sold it in part as a way to shift more taxes onto high-income, high-tax states like California, New York and New Jersey, all of which lean Democratic.

Districts with state and local tax deductions above national average

But in reality, some of the most vulnerable House Republicans in next year’s midterm elections represent districts that heavily use the state-and-local deduction, a Bloomberg analysis of Internal Revenue Service data shows. For them, the tax-overhaul legislation that Republican leaders have promised to unveil in September could damage their standing with voters.

“When you go after these things that really end up affecting the middle class, there is some risk,” said David Redlawsk, chairman of political science and international relations at the University of Delaware. “There is a constituency that cares about it, especially when you start to think about the property tax piece of it.”

IRS data from 2015—the most recent year available—show that 136 congressional districts had average state and local tax deductions above the national average. Of them, 51 are represented by Republicans.

Some of those districts already show troubling signs for incumbents—13 supported Democrat Hillary Clinton in last year’s presidential election. That group includes Roskam’s district in Illinois, which Clinton won by 7 percentage points. The Democratic Congressional Campaign Committee lists it among those where it plans to focus resources next year. At least four Democrats have already said they’ll compete in a primary for the right to challenge Roskam, who was first elected in 2006.

The Republicans in Clinton districts
13 represent districts where the state-and-local deduction was above the national average

The heavily residential district, which includes leafy, long-settled suburbs west and northwest of Chicago, has a median household income of $93,474, well above the national average of $56,516. The average state and local tax deduction claimed in the district, $9,583, is almost three times the national rate.

Losing that deduction might depress local home values, said Pat Callan, the managing broker and owner of a real estate office there.

That’s because U.S. taxpayers have a choice when it comes to tax deductions: They can either itemize them by compiling their actual expenses for state and local taxes, charitable gifts, home-mortgage interest and certain other items—or take a lump-sum “standard deduction,” that’s the same for all. (This year, it’s set at $12,700 for married couples filing jointly.)

Realtors say killing the state-and-local tax write-off would make the standard deduction more attractive—especially because Trump and congressional Republicans propose to expand it to as much as $24,000 per married couple. As a consequence, the mortgage-interest deduction would lose some of its appeal, damping demand for homes, they say. Nationwide, home prices might fall 10 percent on average if the deduction is eliminated and the standard deduction increased, according to estimates by the politically powerful National Association of Realtors, which wants to preserve the state-and-local-tax write-off.

In Roskam’s district, eliminating it “would have a significant impact,” said Callan, who said he has personally lobbied the congressman on the issue. Home buyers are always “looking at the tax incentives to get them to the point where they feel that owning is a better deal than renting.”

Roskam declined repeated interview requests for this story. In a May 23 Bloomberg Television interview, he said he’s well aware of the fact that many people in his district take advantage of the deduction.

“People like me are being incredibly careful about this,” he said. “I want to make sure that my constituents are not at the raw end of the deal where somehow their state and local taxes are not deductible and yet they don’t get any tax relief on the other side of things.”

The potential loss of the deduction needs to be viewed in the context of a complete tax overhaul that would likely also include lowering rates and making other fundamental changes, Roskam added.

A few Republican House members who represent districts with high property taxes have already said they plan to fight for keeping the deduction, including Leonard Lance of New Jersey and Chris Collins of New York. Other Republicans represent districts that are near the top of the list for the deduction and were won by Clinton. They include Barbara Comstock of Virginia and Darrell Issa, Dana Rohrabacher and Mimi Walters of California.

It’s true that most of the districts with above-average use of the deduction are clustered around the biggest U.S. cities; the 12th Congressional District in New York, represented by Democrat Carolyn Maloney, ranks at the top of the list with $31,078 claimed for each return filed.

But significant use also surfaces in places not typically associated with Democrats: southwest Iowa, northern Colorado, central Arizona and northern Georgia. Even the southern Wisconsin district represented by House Speaker Paul Ryan has average state and local tax deductions of $4,005, above the national average of $3,598.

Eliminating the deduction would raise an estimated $1.3 trillion over a decade, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, two Washington-based policy and research groups. That total could go a long way toward offsetting steep individual and corporate rate cuts Trump and Republicans are eyeing.

In 2015, more than 95 percent of taxpayers who itemized claimed a deduction for state and local taxes, according to the conservative-leaning Tax Foundation. Currently, about 30 percent of tax filers choose to itemize their deductions—but that could drop to 5 percent under the proposed changes, according to the national Realtors’ group.

Taxpayers most likely to be affected by a loss of the deduction are those who have higher incomes and higher itemized deductions, but aren’t subject to the Alternative Minimum Tax, which can eliminate the benefits from deductions for those with higher incomes.

The state and local tax deduction survived the last major tax overhaul in 1986 when President Ronald Reagan wanted to kill it. Then, an eclectic coalition of corporate executives, lawmakers from wealthy districts, mayors and even public-sector unions joined forces to block its repeal.

“It tends to benefit affluent taxpayers and communities and one would expect nothing less from them than to put up a fight,” said Jared Walczak, a policy analyst at the Tax Foundation who has studied the deduction. “It will have significant defenders.”

Fighting to preserve the deduction would put Democrats in a philosophically awkward spot, Walczak said, because they’d be supporting a tax break for some of the wealthiest Americans. “They’d be arguing something very different than their broader principles,” he said.