House GOP Firm on SALT Rollback in Tax Bill, Despite State, Local Protests

House Ways and Means Committee Chairman Kevin Brady, R-Texas, joined by Speaker of the House Paul Ryan, R-Wis., right, holds a proposed "postcard tax filing form" as they unveil the GOP's far-reaching tax overhaul, on Thursday, Nov. 2, 2017.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, joined by Speaker of the House Paul Ryan, R-Wis., right, holds a proposed "postcard tax filing form" as they unveil the GOP's far-reaching tax overhaul, on Thursday, Nov. 2, 2017. AP Photo/J. Scott Applewhite

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Republican lawmakers on Thursday introduced their sweeping proposal to rewrite the U.S. tax code.

WASHINGTON — The plan House Republicans unveiled Thursday to drastically revamp the U.S. tax code would eliminate the state and local deduction for income and sales taxes, while a similar deduction for real estate property taxes would be capped at $10,000.

State and local government groups, including those that represent governors, mayors, cities and counties have strongly opposed the rollback of any part of the state and local tax, or SALT, deduction. The House bill marks a significant rejection of those concerns.

Americans Against Double Taxation, a coalition representing state and local groups and other interests vowed to continue its fight against the SALT provisions in the GOP bill.

But House Ways and Means Chairman Kevin Brady, a Texas Republican, offered little reason the group should be optimistic.

When Route Fifty asked Brady Thursday whether there was any chance the state and local tax deduction for income tax might be restored in the House bill, he effectively declared it dead.

"No. It won't be returned," he replied.

"The design we have restoring the property tax deduction and sticking with mortgage and charitable, delivers tax relief for families in high tax states," Brady said, referring to tax deductions for mortgage interest and charitable contributions.

The bill would lower the maximum mortgage interest deduction to $500,000. Taxpayers can currently deduct interest on up to $1 million in home mortgage debt.

House Republicans from higher-tax states, such as New York and New Jersey have pushed back against the elimination of the SALT deduction in the tax package, and some made clear Thursday they were not satisfied with compromise language that ended up in the bill.

U.S. Rep. Lee Zeldin, a New York Republican, said he is a “no” vote on the bill in its current form. “We need to fix this state and local tax deduction issue,” Zeldin said. “Adding back in the property tax deduction up to $10,000 is progress, but not enough progress.”

Nick Samuels, vice president and senior credit officer at Moody's Investors Service, said the effects of the lower mortgage interest deduction and the SALT changes would “be felt more sharply in high-income and high-tax states like California, New York, and New Jersey."

“The proposal’s new limits on the home mortgage interest deduction will suppress home values and new home construction in higher-priced markets,” Samuels also said, “slowing property tax growth for municipalities.”

Democrats swiftly derided the GOP legislation.

"It is a giveaway to corporations and the wealthiest," said House Minority Leader Nancy Pelosi, of California.

Major Provisions in the Bill

The 429-page bill, known as the Tax Cuts and Jobs Act, includes a raft of changes to the tax code.

Notably, it would slash the corporate tax to a flat 20 percent rate. The current top corporate tax rate is 35 percent.

For individuals, it would collapse the existing seven tax brackets to four, with rates of 12, 25, 35, and 39.6 percent.

Income thresholds for married couples, filing jointly would be $90,000 for the 25 percent bracket, $260,000 for the 35 percent bracket, and $1 million for the 39.6 percent bracket.

The bill would also roughly double the standard deduction, increasing it to $24,000 for joint-filers and $12,000 for individuals.

A summary of the legislation from the Ways and Means Committee says upping the standard deduction to these levels would simplify the tax system, reducing the number of taxpayers who itemize deductions.

The congressional Joint Committee on Taxation estimated Thursday the bill would reduce federal revenues by $1.49 trillion over 10 years.

According to the Committee for a Responsible Federal Budget, a nonpartisan, nonprofit, about $1 trillion of the bill's cost comes from business tax cuts, another $300 billion from individual tax cuts, and the remaining $200 billion from the eventual repeal of the estate tax.

Not All About SALT for States and Localities

Beyond the state and local tax deduction there are other aspects of the bill that could have implications for state and local governments.

For instance, state governments that link their tax codes to the federal code may need to reexamine policies, deductions and exemptions if federal laws change dramatically.

And the proposed repeal after 2023 of the estate tax, sometimes dubbed the “death tax,” could create new administrative burdens for places that impose the tax at the state level.

This is because these states currently depend on information collected for federal tax returns to enforce their own estate taxes, Urban-Brookings Tax Policy Center researchers noted in a brief this week.

Another provision in the House bill would require that federal taxes be paid on interest earned from bonds that are issued to finance professional sports stadiums and arenas. This would block states and localities from issuing tax-exempt debt to put toward stadium deals.

Big Offset vs. 104-Year-Old Relationship

Republicans adopted a budget blueprint last month that cleared the way for tax cuts to add as much as $1.5 trillion to federal deficits over the next decade. Restricting the SALT deduction is a major step toward offsetting slashed taxes to keep within the bounds of that total.

Estimates show the entire SALT deduction is worth $1.3 trillion to $1.8 trillion over 10 years. Those dollar figures represent the amount of revenue the federal government would otherwise collect if the tax break were not in place. The real estate property tax component of the deduction accounts for about one-third of the its overall value.

Figures from the Tax Policy Center show that nationally about 30 percent of tax returns included claims for the SALT deduction in 2015. About 55 percent of taxpayers who claimed the deduction had incomes under $100,000. But about three-quarters of the $552 billion in deductions were claimed by filers with incomes above $100,000.

State and local government leaders who support the SALT deduction argue, among other things, that eliminating it would make it harder for their jurisdictions to impose or raise taxes because those taxes could no longer be written-off on federal tax returns.

“Hundreds of local and state governments levy income and sales taxes to pay for community development, schools and public safety under the premise that their residents will not face double taxation from the federal government," National League of Cities President Matt Zone, a city council member in Cleveland, Ohio, said Thursday in a statement.

"Today’s legislation nullifies this 104-year-old relationship and forces local and state leaders to choose between double taxing residents or cutting vital services," he added.

A markup session for the House bill is scheduled for Monday in the Ways and Means Committee.

This story has been updated throughout with additional comments and information.

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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