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Hatch Wavers on Repeal of State and Local Deduction

Posted on September 29, 2017 by Stephen K. Cooper, Dylan F. Moroses

The Senate’s top GOP taxwriter suggested September 28 that the popular state and local tax deduction may be spared from repeal as Republicans focus their attention on drafting comprehensive tax reform legislation this fall.

Just one day after the “Big Six” group of congressional and White House Republicans unveiled their long-awaited unified tax reform framework, Senate Finance Committee Chair Orrin G. Hatch, R-Utah, told reporters that “if we can, I’d like to keep” the state and local tax deduction.

Hatch’s brief remarks could signal the difficulty lawmakers face as they try to eliminate dozens of popular credits and deductions favored by U.S. taxpayers, despite months of internal Republican negotiations to develop a consensus plan that can swiftly move through Congress and be signed into law by President Trump.

Although the state and local tax deduction was not specifically mentioned in the newly released nine-page framework, House Ways and Means Committee Chair Kevin Brady, R-Texas, said the provision would be repealed. However, Brady also said he would work with lawmakers opposed to repeal and has already received some ideas.

Eliminating the deduction is becoming one of the early fights facing Republican lawmakers, who have promised more economic growth and jobs by dramatically lowering corporate, small business, and individual rates. All of this which would be paid for by ridding the tax code of loopholes, credits, and deductions, they said.

Critics of the GOP proposal say that capping federal deductibility for mandatory state and local property, sales, and income taxes would represent double taxation on local residents. “Elimination would effectively increase marginal tax rates for certain taxpayers, shrink disposable income and harm housing markets, damaging the U.S. and local economies,” according to a letter from Americans Against Double Taxation, a group that has reassembled for the first time since 1986.

Republican lawmakers expressed mixed opinions about the Big Six tax reform negotiators’ plans for the state and local tax deduction.

Finance Committee member Rob Portman, R-Ohio, noted that the GOP tax reform plan needs to include the $600 billion to $800 billion in revenue raised from eliminating the deduction in order to lower tax rates. “The philosophy is the federal government should not be subsidizing higher rates in states that choose to have higher taxes,” he explained.

Rep. Thomas MacArthur, R-N.J., said he supports keeping the deduction and posited that repeal will lead to tax reform being financed by the taxpayers who are losing the ability to itemize. States like New Jersey will be making up the revenue lost because the border-adjustable tax proposal was removed from the consensus framework, he said.

However, Rep, Chris Collins, R-N.Y., said about 98 percent of the residents in his congressional district would not have to itemize if Congress doubled the standard deduction, so fewer people would use the state and local deduction.

Speaking at the Heritage Foundation in Washington, Brady discussed how the business tax reform components of the framework would equate to more jobs and higher wages for U.S. families, particularly emphasizing the benefits for middle-income Americans.

“We’re eliminating the current maze of special interest loopholes that . . . offer nothing but confusion for working families,” Brady said, adding that by doubling the standard deduction, Americans would keep more of their earnings and not face the hassle of itemizing.

Follow Stephen K. Cooper (@ScoopOnTaxes) and Dylan F. Moroses (@DMoroses3244) on Twitter for real-time updates.