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In a nutshell: GOP proposes to eliminate the deduction for state and local income taxes when figuring taxable income for Federal taxes. What's your take?

by Sahil Kapur
April 18, 2017, 4:00 AM CDT April 18, 2017, 7:25 AM CDT

Deduction benefits wealthy filers in high-tax jurisdictions
Conservatives call it subsidy for state, local tax increases

Conservative activists and House Republican leaders want to eliminate a trillion-dollar tax break that mostly benefits wealthy filers in Democratic states, a push that could further imperil President Donald Trump’s hopes of winning bipartisan support for a tax overhaul.

Ever since the inception of the federal income tax in 1913, taxpayers have been allowed to deduct the state and local income taxes they pay from their taxable income. Anti-tax crusaders, including Grover Norquist, the president of Americans for Tax Reform, say the deduction represents bad policy.

“When you allow people to deduct their state and local taxes against the federal tax, you in effect subsidize tax increases at the state and local level,” Norquist said an interview. “The way to solve that is to get rid of the deduction. It’s good tax policy. It’s good tax reform.”

The deduction is a rare tax break for high earners that conservatives want to abolish and Democrats want to protect, a dynamic that scrambles the traditional partisan divide.

“Republicans don’t like the idea of subsidizing state and local governments,” said Roberton Williams, an economist with the nonpartisan Tax Policy Center. “This is transferring money from low-tax states to high-tax states. So this doesn’t rank high on the list of deductions and preferences they like. The flipside of that is Democrats like the idea of states having more funds.”

Higher Incomes

Trump hasn’t taken a public position on the issue, and White House spokeswoman Natalie Strom declined to comment on his thinking. “He’s continuing to hear input from all sides” on a potential tax plan, she said, describing it as a high priority.

Williams said the president, a wealthy New Yorker, has “almost certainly” benefited from the tax break in the past; Strom also declined to comment on that.

Ditching the deduction would raise federal tax revenue by $1.3 trillion over 10 years, according to the Tax Policy Center, which found that 90 percent of that increase would be paid by taxpayers who earn $100,000 or more.

The largest beneficiaries of the tax break are California, New York and New Jersey, all relatively high-tax blue states, which eat up more than a third of the nationwide benefits, according to the nonpartisan Committee for a Responsible Federal Budget.

“Blue state, red state, it doesn’t matter to us. It’s still bad policy,” said Andy Roth, a lobbyist for Club for Growth, a conservative pressure group. “The state and local tax deduction is just a subsidy for government to tax and spend more money.” The Heritage Foundation, a right-leaning research and advocacy group, urged Congress in a recent report to “repeal the deduction and use the revenue gained to reduce federal marginal tax rates.”

Ryan’s Blueprint

House Speaker Paul Ryan has proposed to do just that. The blueprint for tax reform that he introduced last summer -- which has drawn most notice because it proposes a controversial border-adjusted tax -- would kill the deduction.

Yet the intraparty politics surrounding the issue could be tricky. In the House, 28 Republicans represent New York, California and New Jersey combined, and the GOP can only afford to lose about 20 of its own members to pass a bill without Democratic support.

“You’re going to see Republican members in those states fighting to keep those deductions,” said Representative Chris Collins, a New York Republican. The state and local tax break is “big for New Jersey, New York, California,” he said.

Democratic opposition is assured.

‘Vigorously Fight’

“Any proposal to eliminate or scale back the state and local deduction would result in a significant tax increase on middle-class Americans,” said Matt House, a spokesman for Senator Chuck Schumer of New York, the Democratic leader. “Senator Schumer will vigorously fight this proposal.”

Trump has refused to release his own tax returns, a departure from four decades of precedent. Keeping them a secret could complicate tax-reform legislation, Schumer told reporters last week. “He just has an obligation to come clean,” Schumer said. “When you clean up the swamp, it’s not keeping things secret.”

Shortly before he took office in January, Trump met with New York Governor Andrew Cuomo, a Democrat, and discussed taxes. Cuomo told reporters he conveyed to Trump that ending the state and local tax deduction “would be devastating for the state of New York” and others.

The prospect may be moot if Republicans decide not to offset the cost of their tax plan. While Ryan remains committed to a permanent overhaul, which would likely have to be revenue-neutral, several top GOP senators have floated a straight tax cut that would automatically expire after 10 years.

Scrapping the state and local tax break would be “as much a punishment of blue states as it is simplifying the tax code,” said Stan Collender, a fiscal policy expert and former congressional Democratic budget aide. “It tends to hurt states with blue governors and high tax rates, and probably didn’t vote for Trump and isn’t likely to vote for a Republican presidential candidate anytime soon.”

No way. Those taxed dollars are not available to me and should not count as taxable income

Talk to your state representatives to reduce your state income tax burden.

Hitler, a pedophile, an animal torturer and a serial killer all come to your house for dinner, what do you serve and who do you serve first?

Yeah, that's what I think about government.

Sorry, I don't let liberals past the front door.

This

I agree that it is bad policy to deduct taxes on fed filings. This proposal IS a tax increase though. It will increase the amount of money siiezed by the fed.gov.  It will feed the beast when the goal is to reduce the power of fed.gov.

Getting rid of the tens of thousands of pages of tax code is going to cause some rebalancing.

I have no problem that it hits the Lib states.  But, it'll guarantee a Dem majority in 2018 for sure.

Not a good deal

Are you advocating for double taxation?

This is just another carrot on a stick in front of the donkey. Another scene in a never ending play.

First: we need a dictator. Or maybe just a tax dictator. Dictator says, "October 1, 2020 the entire tax code goes in the shitter. No mo money fo you! Get to work and come up with a replacement."

It would focus the Congress' attention. It would eliminate their mischief in other areas.

meh, it's just a dream.

Here's an idea. How about zero income tax and a fixed sales tax.

Problem solved.

Sounds like double taxation to me.  How about property taxes too then.

Agreed.

So, a full third of federal taxes aren't being paid because rich democrats have a loophole... and half you guys don't want to fix the loophole so that democrats have to pay the same amount as the rest of us?

Fuck, let's just pass a law that says only republicans have to pay taxes, and be done with it. That should make you guys happy.

No tax increases for anyone, not even people I don't like.

All this does is give the federal government more money and power.

I have about a dozen different property taxes from different authorities rolled into one bill.  

Framing it as a "rich blue state" argument is dangerous and a slippery slope.  I'll guarantee those same blue states are among those who most benefit from the mortgage interest deduction and the property tax deduction.

I'm all for it. Also the mortgage interest deduction and the child tax credit need to go. And rates adjusted down to match.

Yes, property taxes shouldn't be deductible.

And theres your answer.

they have enough money already.  

Two more deductions that should be eliminated.

That's why we should eliminate deductions and lower rates until we get the same revenue we do now, but with a freer market.

Are they counting property taxes as state and local taxes because if so there goes my plans for a new house if this passes

How about no deductions/cutouts for anyone and a flat or fair tax instead?

LOL....If that happened K-street would become Section 8 housing.

Ironic.

Tax reform raises taxes.

On 6 figure incomes

The right doesn't have the will to win. Collectively we are too busy arguing about morality and ideology.

We should be aborting future Democrats, cutting tax breaks for Democrats and pursuing policies that render the government jobs held by Democrats redundant.

This isn't a tax break used by wealthy liberals in blue states. It's used by anybody in any state who itemizes their deductions and it exists simply because NO government, state, local, or federal, should have the right to tax your money multiple times.

If you are paying your property taxes, state income taxes, local income taxes, school taxes, and whatever other taxes AFTER the federal government has already seized their cut, then you are paying taxes out of money that's already been taxed. This is saying that if you make $100,000 and pay $6,000 in state income taxes, then the federal government calculates your tax bill based on $100,000 of income even though $6,000 of that already went to the government and is not available to you.

The framing of this situation and the arguments in support of it are idiotic, even by GD standards.

Keep the progressive income tax without deductions.

Actually the charitable tax deduction and one or two others that I forget.

Flat taxes are a mess because any tax rate high enough to fund the minimum level of spending that is politically possible is ruinously high for unskilled workers.

What happened to the "taxes done on a postcard" plan of Trump's?

Oh.

Why should the federal government collect tax revenue from low tax states but let you in high tax states keep your money in state?

so you want a theocracy?

interesting take.

Combat Jack's tax plan.  "Get rid of shit I don't like and keep shit I do like"

This.  Nothing like getting taxed multiple times on the same amount.

This is an important part of it.

Exactly! It effects anybody who itemizes, not just the rich... And that encompasses a good chunk of the middle glass. Unless they adjust the tax brackets lower accordingly, its nothing more than a tax hike.....If they do this, they GUARANTEE the Dems congress in the next midterm and the White House next presidential election.

In federalism a man had two or three masters. He owes each their due independent of the others.

So your last sentence prevents your second sentence's ox from being gored.....Got it.

Just outlaw state income taxes outright. It's ridiculous that I owe the state every year when feds give me refunds.

You're a funny guy, you know? That's hilarious.

Tithes shouldn't be tax deductible.

But anyone's tax plan is to prefer what they like to what they don't.

repeal the 16th amendment.  Nationwide VAT.  No federal income tax at all.

We did it in '86. I've sat at the table that law was signed on.

Ideologically conservatives would typically want states to tax more than the federal government and pay for heir own programs.

It only benefits people who itemize in states with high taxes. If you eliminate these deductions and lower rates then it's effectively increasing the income of people in low tax states.

Move to a free state.

Let the Feds take their cut first, deduct that from earned income, and the states can redistribute their percentage of what's left to legal aid for illegal immigrants

Yup.

Pay on what you earn.

I have issues with consumption taxes but this would be better than what we have now.

It's not double taxation at all.   And I agree with this proposal as long a rates are rebase lined after this and other reforms take effect to  cause no overall tax increase.

If you make 100k and federal is 25% and state is 5%  you pay 25K to feds, and 5K to state.   You shouldn't get to tweak the math and pay only 23.5K.  

Why should you pay less Federal taxes, than someone who lives in a fiscally responsible state with no income tax?  It's awfully FSA of you to insist someone making the same income who lives in Florida or Texas should pay more Federal income tax than you do.

Well, given that states without state income taxes can deduct property and sales taxes, I'd say it's a bit misleading.  Probably not a popular answer in GD, but it's the truth.