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Congress Passes Final Tax Reform Bill With Capped SALT Deduction

Posted on December 21, 2017 by Paige Jones

Both chambers of Congress approved on December 20 a last-minute amended version of the GOP tax reform package, which maintains the capped state and local tax deduction for individuals from an earlier version.

The bill now advances to President Trump, who may have to delay signing the bill until early 2018, unless Congress waives the “pay as you go” budget rule before adjourning for the year, the White House said.

The House gave final approval to the amended version of H.R. 1 hours after the Senate amended the roughly 500-page legislation to comply with the upper chamber’s Byrd rule and passed it 51 to 48. The House concurred with the Senate changes on a 224-201 vote. 

The final bill maintained the December 15 compromise, which would allow individuals to claim up to $10,000 of state and local property taxes and either income or sales taxes. The cap would expire on January 1, 2026.

The lower chamber initially passed the bill 227 to 203 on December 19, advancing it to the Senate for final consideration. The Senate parliamentarian, however, found three provisions in the bill that were in violation of the Byrd rule, and those failed to get the necessary 60 votes to remain in the measure.

The upper chamber removed the three provisions, which concerned the use of section 529 savings accounts for home-schooling expenses; the criteria for determining whether private university endowments will face an excise tax; and the bill’s short title, the Tax Cuts and Jobs Act. The Senate then approved the bill shortly after midnight on December 20.

Under the Congress-approved bill, the deduction for state and local property and sales taxes that are “paid or accrued in carrying on a trade or business or an activity described in section 212” would remain without a cap. The sectional guide attached at the end of the bill stated that “under the provision, in the case of an individual, state and local income, war profits, and excess profits are not allowable as a deduction.”

The bill would also prohibit individuals from claiming “an itemized deduction in 2017 on a prepayment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017,” according to the sectional guide. This provision thwarts nascent efforts by individuals to prepay 2018 taxes to avoid the new $10,000 cap on the SALT deduction.

The final legislation also kept elements from the conference report, including:

  • reducing the mortgage interest deduction's principal limit for new mortgages from $1 million to $750,000; and

  • increasing the cash contributions deduction limit from 50 percent to 60 percent of adjusted gross income for donations to qualifying charities.

Not All Republicans Satisfied

While the majority of House Republicans cheered the bill’s final passage December 20, not all did.

Twelve House Republicans voted against H.R. 1 both on December 19 and 20. Eleven of the opposing GOP lawmakers hail from the high-tax, Democratic-leaning states of California, New York, and New Jersey.

Rep. Peter T. King, R-N.Y., voted against the final bill both times. In a December 19 tweet, he said the $10,000 cap "is not enough for most [Long Islanders] and will devalue our homes by 10–15 percent. While most of the country will get [a] tax cut, it will be paid for by [Long Islanders] who will get a tax increase." 

The conference committee expanded the SALT deduction in the compromise package unveiled December 15, in light of mounting pressure from federal lawmakers and state leaders from high-tax states, to allow individuals the choice of deducting property taxes and income or sales taxes.

The original proposal by the House Ways and Means Committee, which the House passedNovember 16, called for eliminating the federal deduction on state and local income and sales taxes, preserving only the itemized property tax deduction up to $10,000. The Senate Finance Committee’s tax plan, which passed with modifications December 2, proposed suspending the SALT deduction for individuals until 2026.

Thirteen House Republicans voted against the House version on November 16. Of them, only Rep. Tom McClintock, R-Calif., changed his mind and voted for the final versions in December. McClintock in a November 16 release complained that the changes made to the SALT deduction targeted Californians. 

Democratic governors from New YorkVirginia, and Connecticut decried the passage of the bill on December 19. New Jersey Gov.-elect Phil Murphy (D) on December 20 tweeted, "We won't give a pass to the Republicans who voted 'no' but didn't speak out forcefully or lobby their colleagues. It is New Jersey, and states like us, who are paying for this plan out of our pockets. We won't have short memories — 2018 is just around the corner."

Iowa Gov. Kim Reynolds (R), however, on December 20 lauded the bill’s passage, saying that “Iowans deserve a fairer, simpler, more competitive tax code, and I commend Congress, particularly members of the Iowa delegation, and the administration for working tirelessly to get that done.”

State tax experts were divided on the SALT deduction cap for individuals included in the final bill, with conservatives calling for a full repeal of the SALT deduction and liberals pushing to preserve it.

Treatment of Incentives as Taxable Corporate Income 

The Congress-approved tax bill includes a revised provision from the initial House-approved version to treat contributions a corporation receives from state and local governments, civic groups, and customers as taxable income.

The bill would maintain that “contributions to capital” are not included in a corporation’s gross income, but excluded from the term are “any contribution in aid of construction or any other contribution as a customer or potential customer” well as “contribution by any governmental entity or civic group (other than a contribution made by a shareholder).”

“Assuming it’s the same as the House version, it will make grants to corporations subject to federal income taxes,” Burnet Maybank III, a former director of the South Carolina Department of Revenue who is now with Nexsen Pruet, told Tax Analysts December 18. “This reverses the law for some 60–70 years . . . [as] many other economic development incentives will remain nontaxable.”

The House version passed November 16 proposed “remov[ing] a federal tax subsidy for state and local governments to offer incentives and concessions to businesses that locate operations within their jurisdiction (usually in lieu of location operations in a different state or locality),” according to a bill summary. This provision was not included in the Senate version approved December 2.

Maybank predicted that the provision would “level the playing field for the Southeastern states (which routinely give grants) with Rust Belt and Northern states, which do not.” He added that “naturally, companies will request larger grants, given that they are now taxable income.”

As a result, states are likely to “be more careful in grant paperwork,” Maybank said.

Greg LeRoy, executive director of Good Jobs First, a think tank that tracks state tax incentives, told Tax Analysts December 19 that “if this bill means that companies will still keep 80 percent or more of their state and local subsidies, then it will have no positive effect on the ‘economic war among the states.’”

“The race to the bottom will continue, and governments will keep overspending on deals like Amazon’s HQ2 auction,” LeRoy said.