GOP Struggles to Win Over Dissidents on State and Local Tax Break

  • Members in high-tax states argue for preserving deduction
  • Schumer says Republicans debating ‘unsolvable Rubik’s cube’

IMF's Lagarde Says Hoping for Solid U.S. Tax Reform

House Republican leaders met Thursday to discuss a possible accommodation for rank-and-file members in high-tax states who want to preserve a tax break for their districts -- an attempt to lift a major barrier to passing a tax overhaul.

“We’re narrowing options and they’re paying attention to us,” Representative John Faso of New York said after leaving the meeting in House Speaker Paul Ryan’s office. Faso added that it’s still too early to know the outcome. “A lot of work has to be done,” he said.

Faso said one option discussed as an alternative to repealing the state and local tax deduction was to limit the tax break to people who earn under a certain amount. Representative Peter King of Long Island and others have suggested phasing the deduction out above adjusted gross incomes of $400,000.

“The more we can narrow that relief in, that helps to bridge the difference,” said Representative Tom Reed of New York.

The Tax Foundation, a conservative policy group, estimated that capping the tax break at $400,000 would raise just $481 billion -- about one-fourth of the $1.8 trillion that the group says a full repeal would raise over a decade.

The debate over the state tax break reflects the challenge bedeviling Republican leaders. Their rough framework is already $2.4 trillion in the red assuming full repeal of the state and local deduction -- according to one independent analysis. Capping it would exacerbate their math problems, while seeking to end it would threaten some middle-income families with tax hikes and imperil the votes of several dozen Republicans in high-tax states like New York, New Jersey and California.

‘Rubik’s Cube’

“When it comes to the state and local tax deduction, Republicans are playing with an unsolvable Rubik’s Cube,” Senate Democratic Leader Chuck Schumer said in a statement.

Emerging from Thursday’s meeting, House Ways and Means Chairman Kevin Brady indicated that a final solution on the so-called SALT deduction would be “folded into the full” legislative proposal. A bill is slated for release by Brady’s panel after Congress adopts a budget resolution, unlocking the process GOP leaders want to use to pass a bill without Democratic support. “We recognize the burden of those taxes in the high-tax states,” Brady said.

Other alternatives to full repeal of the deduction include letting taxpayers choose between deducting mortgage interest or property taxes -- a suggestion floated by New York Representative Chris Collins, an ally of President Donald Trump.

“There are a number of ways to skin this cat,” said Representative Tom MacArthur of New Jersey, arguing that property taxes must remain deductible. He added that his state paid more in taxpayer dollars than it received in benefits -- a response to conservative critics who say the state and local tax deduction effectively lets the federal government subsidize high-tax states.

‘Solvable Problems’

Some lawmakers signaled they weren’t interested in any changes to the SALT deduction.

“I favor retention of SALT in its entirety,” said Representative Leonard Lance of New Jersey. “We are a district that sends a great deal more funds to Washington than we receive back, and I think that has to be part of the context.”

The treatment of the state and local tax deduction is the latest debate over how to pay for a tax bill, one of the thorniest problems that has prevented Congress from rewriting the tax code since 1986. Earlier this year, Republicans defeated a proposal by Ryan to impose a border-adjusted tax on companies’ imports. The tax was estimated to raise more than $1 trillion over a decade.

“We had border adjustment. You’ve got SALT now,” Reed said. “There are going to be many, many issues that come down the pipeline as we go forward. But these are all solvable problems -- if people work at it in good faith.”

— With assistance by Erik Wasson, and Arit John

    Before it's here, it's on the Bloomberg Terminal.