How Republicans May Deal With the State and Local Tax Break Issue

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  • Tim Scott says Senate tax bill likely to fully repeal SALT
  • Scott expects debate on modifying mortgage interest deduction

Trump Prioritizes Preserving Middle Class Tax Break

The treatment of state and local tax deductions will be the “largest hang up” for Republican efforts to revamp the individual side of the tax code, Senator Tim Scott of South Carolina said Friday.

Scott, a member of the tax-writing Senate Finance Committee, said he expects the panel’s tax bill will repeal the so-called SALT deduction entirely. But the House -- where roughly two dozen Republican members want to preserve the break in some form -- will likely include an income cap on it, “in the $200,000 to $250,000 range,” he said.

House Republican leaders met Thursday to discuss a possible accommodation for those members, who represent districts in high-tax states, including New York. Representative Peter King of Long Island and others have suggested phasing the deduction out above adjusted gross incomes of $400,000.

“Watching the debate today in the House, it appears they’re going to land somewhere in the middle of that,” Scott said. His remarks came during a panel discussion at a policy meeting for conservative donors organized by the Koch political network at the St. Regis Hotel in New York.

The debate over the state tax break reflects the challenge bedeviling Republican leaders. Full repeal of the SALT deduction is estimated to raise more than $1 trillion that could help pay for deep tax rate cuts for businesses and individuals. But capping SALT instead would greatly reduce that savings, making it more difficult to write a revenue-neutral tax bill.

At the same time, including full SALT’s full repeal in the bill would threaten some middle-income families with tax hikes and imperil the votes of several Republicans in high-tax states, including New Jersey and California.

Mortgage-Interest Deduction

Scott said he expects debate over whether to modify the mortgage-interest deduction -- by capping it at home loans of up to, say $650,000 or $750,000. The deduction is currently capped at loans up to $1 million for married couples -- and the politically influential National Association of Realtors has opposed changes in the past. The tax framework released last month by the White House and GOP leaders says tax breaks for home mortgage interest and charitable contributions would be retained.

“Capping the mortgage interest deduction amounts to a de facto tax increase on current and future homeowners and puts homeownership further out of reach for prospective buyers,” NAR said in a recent statement. “We would have strong objections over any effort to do so, as would the 1.2 million Realtors we represent.”

“It’s going to be important that we get that right,” Scott said, referring to the mortgage interest deduction. He said he doesn’t expect any changes to the deduction for charitable giving or to the current exclusion of employer-sponsored health insurance from taxable income.

On the corporate side, Scott said, main points of debate will focus on whether to allow companies to fully deduct their spending on new facilities and equipment -- instead of doing so over time -- and on whether or how to limit the deductibility of corporate interest payments. The tax framework calls for corporate interest deductions to be “partially limited,” without providing any details.

Senator David Perdue, a Georgia Republican who also appeared at the Koch policy meeting, called the full expensing provision, which the framework would limit to just five years, “a tax gimmick.” House Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady have proposed the change -- which in effect would accelerate companies ability to recover the costs of their investments -- as a way to stimulate growth.

Yet Perdue said he finds the fact that lawmakers are even considering the expensing provision at “this late hour” troubling -- a sign that Republicans have to rapidly reach agreement on tax legislation.

‘Minority Party’

If the GOP fails to deliver a tax bill that stimulates the economy, “we’ll be the minority party for the next 15 years to 100 years just like we’ve been for the last 100 years,” said Perdue, the former chief executive officer of Reebok athletic brand and of Dollar General Corp.

Senator Ted Cruz of Texas reiterated what a tax bill failure would mean for the GOP majority at the policy meeting.

“If tax reform crashes and burns, if on Obamacare nothing happens, we could face a bloodbath,” Cruz said. “Why? Because the left is energized, is ticked off. They’re showing up.”

Governor Scott Walker of Wisconsin said he was concerned that failure could spill over to state-level elections, hurting Republicans in “governors and state legislators’ races across the country.”

While billionaire industrialists Charles and David Koch and their network didn’t support President Donald Trump’s campaign, the network says it supports the principles outlined in the tax framework. Tax overhaul is the top priority for the Koch network, which plans to spend about $400 million on Republican candidates and causes during the 2018 election cycle.

The network won’t draw any “red lines” on changes to the tax laws; it’s simply pushing to get rid of carve-outs for special interests and lower tax rates across the board, said James Davis, a spokesman for the Koch political network.

— With assistance by Ben Brody

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