Tax standoff: State and local tax deduction focus of GOP private mtg. Wednesday

The fate of one of the most controversial and in some places cherished perks in the U.S. tax code—the deduction for state and local taxes – could be decided as early as tonight as GOP lawmakers meet to hash out a plan that might still preserve the deduction, the FOX Business Network has learned.

As previously reported the deduction has been targeted by the Trump administration for elimination in its broader tax reform efforts. But GOP lawmakers from high-tax states are vowing to deal a potentially lethal blow to tax reform if the deduction isn't preserved in some way.

To avert that, House leaders will conduct a meeting, scheduled for 9 p.m. Wednesday, which could result in a compromise on the deduction.

One option would preserve the tax break for most Americans, but could force some higher-income earners to no longer benefit from the perk, congressional aides and lawmakers tell FOX Business.

The meeting will be attended by about two dozen Republican representatives, mainly from New York, New Jersey and California, House Majority Whip Rep. Steve Scalise (R-Iowa), House Majority Leader Kevin McCarthy (R-Calif.) and House Ways and Means Committee Chairman Rep. Kevin Brady (R-Texas).

The possible compromise on the deduction comes as the House prepares to produce a tax reform bill as early as next week that would cut taxes on individuals and business, according to people with knowledge of the matter.

The state and local tax deduction (SALT) affects about 30% of all taxpayers, mainly in states such as New York, New Jersey, California, Connecticut, Virginia and Pennsylvania that impose significant state income taxes. The GOP Congress is dominated by lawmakers from southern and western states that don’t impose such levies. They have argued for ditching the SALT deduction from the tax code on the grounds that it unfairly benefits taxpayers from just a handful of states and deprives the federal government of trillions in revenue.

Indeed, the Trump administration has called on the elimination of the SALT deduction that would produce close to $1.3 trillion in revenues over 10 years and help pay for his plan to slash taxes for individuals and take the corporate tax rate down from its current level of 35% to 20%.

But lawmakers from these high-tax states argue that the federal government receives a disproportionate share of tax revenues from states like New York and California, where a large percentage of wealthy people reside, thus the tax break provides some degree of fairness in the government’s revenue collection efforts.

Making the matter even more contentious as the Republican controlled Congress and the Trump administration move toward the politically vital tax reform bill: close to 60 Republican members come from those states that have benefited from the SALT deduction and could vote against the tax reform if the tax break isn’t preserved in some way.

Rep. Tom MacArthur (R-N.J.) – a staunch supporter of keeping the SALT deduction—told FOX Business that he should expect a solution at tonight’s meeting that could allow for some type of compromise that would maintain the perk more most taxpayers. But he added if the full deduction is eliminated, passage of the budget resolution and tax reform “could be a problem."

“The response has continually been ‘yes, we are going to work this out but there was nothing specific,’ other than ‘we are going to work it out,’” MacArthur said, “I’m told we can expect something more specific tonight.”

MacArthur said a group of lawmakers from these high-tax states met Tuesday night to debate how to include at least part of the deduction, which allows taxpayers to deduct state and local property taxes, state and local income taxes or general sales taxes.

“One [solution] is to allow a full deductibility of property taxes,” MacArthur said. “Another is to allow deductibility on income taxes and sales taxes but only up to a certain income level. I’m concerned with another proposal that may use tax credits versus deductions and apply it more broadly across the entire country.”

The idea of cutting back the SALT deduction for those who hit a certain income level has gained momentum in recent weeks, including the idea that those making more than $300,000 could lose the loophole entirely, those same sources say.

“I know there are ongoing talks with members representing states such as New York, New Jersey and California who are particularly sensitive to the local and property tax deductions and they are looking for a compromise,” said Rep. Peter Roskam (R-Ill.) a ranking member of the House Ways and Means Committee.

When asked if his committee is looking at capping the state and local tax deduction, Roskam said “All of those ideas have been discussed within my circles.”

A spokesman for Scalise did not deny that leadership was on the verge of cutting a deal with concerned Republicans. When asked if they are going to propose a compromise at Wednesday’s meeting, the spokesman, Chris Bond, said “The dialogue is ongoing, and both the committee and leadership are working with members from these states to address their concerns. We will keep you up to speed on that process as it plays out.”