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Medical, SALT Deductions Could See Changes in Tax Bill Conference

Posted on December 7, 2017 by David van den Berg, Zoe Sagalow

With a newly formed conference committee set to resolve differences between the House and Senate versions of tax reform, some lawmakers are pressing conferees to err on the side of generosity toward taxpayers when it comes to the medical expense deduction and the deduction for state and local taxes.

House Ways and Means Committee Chair Kevin Brady, R-Texas, a member of the conference committee, told reporters December 6 that he’s heard from advocates and lawmakers regarding the medical expense deduction but that no decision has been made on how to proceed.

“I’m not getting ahead of our conferees or our discussions,” Brady said. “But because there is a difference between the House version and the Senate version, yes, it will be discussed in conference.”

The House version of the Tax Cuts and Jobs Act (H.R. 1) would eliminate the medical expense deduction, while the Senate-passed bill would temporarily lower the floor for the medical expense deduction to expenses exceeding 7.5 percent of adjusted gross income, effective for 2017 and 2018. Under current law, taxpayers can deduct medical expenses only if they exceed 10 percent of AGI. (Side-by-side comparison of the GOP tax plans.)

“I think there’s a lot of support for keeping the medical expense deduction,” Ways and Means Committee member Carlos Curbelo, R-Fla., told Tax Analysts. Curbelo also said he’s “fine with” the Senate’s approach on the deduction.

Rep. Thomas MacArthur, R-N.J., agreed. “The Senate has it right because they left it in,” he said.

“When I look at the rationale for deductions and credits, they’re broad-based, significant public policy interests,” MacArthur said, citing the encouragement of homeownership by the mortgage interest deduction, care for children and elderly parents by the child and other tax credits, and charitable giving by the charitable contributions deduction. Medical costs should be in that group, he said.

“I think we have a good public policy interest in allowing people to deduct that and not go bankrupt or not pay their medical bills,” MacArthur said.

However, Ways and Means member Jason Smith, R-Mo., told Tax Analysts that lawmakers “need to find a middle ground” between the bills on the medical expense deduction. And fellow Ways and Means Republican James B. Renacci of Ohio said that while “we should take care of those that have extreme situations . . . doubling the standard deduction pretty well takes care of everybody.”

SALT Deduction Options

In addition to the medical expense deduction, some Republican lawmakers — particularly those representing California — have called for changes to provisions in the bills regarding the SALT deduction. Both the House and Senate bills would limit the deduction to up to $10,000 in property taxes.

Adding an option to deduct state and local income taxes may be one way to satisfy those concerned about the current provision, Senate Majority Leader Mitch McConnell, R-Ky., said December 6. 

In an interview on The Hugh Hewitt Show, McConnell said that giving taxpayers the option to deduct either property taxes or income taxes “sounds like a kind of reasonable idea.” Brady also told reporters December 5 that creating an option to make state and local income taxes deductible could be one of the changes negotiators will consider.

McConnell said a change to the state and local tax deduction is one of many “dials” that will be turned during negotiations in the House-Senate conference committee, but he expects that efforts to pass the tax bill will move quickly enough to have it sent to the White House before Christmas.

Other lawmakers want the SALT deduction preserved in its entirety. Reps. Josh Gottheimer, D-N.J., and Leonard Lance, R-N.J., announced a bill December 5 to do so that would also preserve the medical expense deduction and the deduction for student loan interest — all while reducing the deficit by $100 billion. The bill would keep the corporate tax rate at 20 percent but remove the step-up in basis for the estate tax, and it would need $600 billion, Gottheimer told reporters.

“If you’re from a SALT state like mine, I think the reaction is clear: It’s a tax hike for people in our states and my district,” Gottheimer said of the SALT proposal in the Tax Cuts and Jobs Act. He added that he is hearing concerns about property values dropping by 15 or 20 percent. Gottheimer argued that declining property values could lead to fewer resources for communities, such as for schools and law enforcement.

Rep. Peter T. King, R.-N.Y., said he supports the proposal, adding that he hopes it will become a major part of the tax reform conversation. “Once you offer a compromise, then they cut that in half,” he told reporters.

MacArthur, however, dismissed the plan’s chances. “When two people who vote no on a bill propose a solution that still might not get them to yes, that’s not going to get heard, really,” he said.

The elimination of the alternative minimum tax under the House bill is also a strike against retaining the full SALT deduction, MacArthur said. “You cannot have unlimited SALT deductions because that benefits the wealthiest people who used to lose those deductions in the AMT,” he said. “The moment you get rid of the [AMT] you have to cap these somewhere.”

Pushing for Tuition Waiver Change

A bipartisan group of lawmakers is also pushing for the removal of a provision in the House tax bill that would eliminate the exclusion for graduate tuition waivers.

“We believe we’ve received favorable feedback from [the] conferees about that,” House Rules Committee Chair Pete Sessions, R-Texas, a signer of the December 6 letter, told reporters. Sessions said he has talked to Brady about removing the provision from the final bill and that “I think there is pretty clear resolution to agreement on this.”

The letter had not been released as of press time December 6.

Asha Glover and Brett Ferguson contributed to this article.

Follow David van den Berg (@TAtaxDavidVDB) and Zoe Sagalow (@thesagaofzoe) on Twitter for real-time updates.