The final details of a proposal to preserve the itemized property tax deduction will be discussed October 31, according to House Ways and Means Committee Chair Kevin Brady, R-Texas, who plans to meet with Republican lawmakers from high-tax states whose votes are critical for passing tax reform.
“It’s a large group and they have varied opinions, but I know their response was very positive,” Brady told reporters October 30, two days after Bloomberg and The Wall Street Journal first reported his announcement that the itemized property tax deduction would be preserved.
However, work remains to be done on the state and local tax deduction issue, Rep. Leonard Lance, R-N.J., told Tax Analysts.
“This is a step in the right direction, but I will need to see legislative text to determine if this proposal is in the best interest of New Jersey,” Lance said in an October 30 statement. “We already send more than enough money to Washington. I am pleased this debate has reminded lawmakers from other states of that fact.”
Lance was one of 11 House Republicans from high-tax states New Jersey and New York who voted against the Senate budget resolution October 26. The resolution includes reconciliation instructions that would allow Senate Republicans to pass tax reform legislation on a simple majority vote.
At least two Ways and Means Committee Republicans from high-tax states have told reporters they support changes to the state and local tax deduction. Rep. Tom Reed of New York said he’s comfortable with any compromise covering 99 percent of his constituents, and Rep. Devin Nunes of California said he continues to support eliminating the deduction.
“It may not be what we end up with, but I absolutely support” that idea, Nunes said, adding that “the property idea has some merit, but I still support the full elimination of the income tax [deduction], absolutely.”
Brady said October 25 that limiting the state and local deduction to property taxes was one option being considered, but didn’t say whether it was agreed to. The unified Republican tax reform framework released in September didn’t specifically mention the deduction, although it assumed its elimination and Brady had said the deduction would be repealed. The handling of the state and local deduction roiled lawmakers leading up to the budget vote.
Revenue and Policy Impact
The Ways and Means Committee is set to unveil its tax reform legislation November 1. The full repeal of the state and local deduction would have provided it a considerable amount of revenue to offset other tax changes.
Retaining the property tax deduction would leave “a lot of revenue on the table,” Jared Walczak of the Tax Foundation wrote in a blog post on the organization’s website. The property deduction is worth about a third of the $1.8 trillion the full repeal of the state and local deduction would provide, he wrote.
“Saving the property tax deduction makes the math somewhat more difficult, but still leaves clear paths forward,” he wrote.
Walczak wrote that retaining the property deduction wouldn’t penalize low-tax states “in the same way that the full [state and local] deduction does” but that “some states and localities continue to benefit disproportionately from a scaled-down, property tax-only deduction” as they currently do under the full deduction. California, Texas, Illinois, New York, New Jersey, and Florida claim more than half of the property deduction, according to Walczak.
Retaining the property deduction also strongly benefits middle-income taxpayers, because while the full state and local deduction disproportionately benefits higher-income taxpayers thanks to highly progressive federal income taxes, the property tax component provides a larger deduction to middle-income earners as a share of adjusted gross income, Walczak wrote.
Brady’s announcement about the property deduction suggests there are challenges ahead for tax reform, said William G. Gale, co-director of the Urban-Brookings Tax Policy Center. “This is a good example both of how difficult true base-broadening tax reform will be and how poorly the Republicans have paved the way for a structural reform,” he said.
Maya MacGuineas of the Campaign to Fix the Debt likewise expressed concern that lawmakers were moving away from making hard decisions on base broadening.
The highly political and polarized environment lawmakers find themselves in right now suggests that “the result will probably be . . . a tax bill that’s really fraught with gimmicks to cover the full cost,” MacGuineas said. She highlighted the possibility of tax cuts being phased in, coming with sunset dates, or relying on “fairy dust” scores of tax legislation, and said that it all “could add to the cost beyond an already-unaffordable $1.5 trillion very significantly.”
Regarding reports that some lawmakers are exploring the possibility of phasing in corporate tax rate cuts, White House press secretary Sarah Sanders said at an October 30 press briefing that one of President Trump’s priorities is that the 20 percent corporate tax rate take effect immediately. “As of right now, that hasn’t changed, and I don’t anticipate that it will,” she said.
Brady also refuted reports the corporate rate cut may be phased in, telling reporters October 30 “At this point we’re trying to get the growth right up front.”
Staying on Track
Despite Trump’s suggestion on Twitter that the indictments could be an attempt by Democrats to undermine the tax reform effort, one top Republican lawmaker indicated that the indictments would have no bearing on the planned tax overhaul.
“All of this ‘Russia’ talk right when the Republicans are making their big push for historic Tax Cuts & Reform. Is this coincidental? NOT!” Trump tweeted.
But House Speaker Paul D. Ryan, R-Wis., dismissed the indictment news during an October 30 radio interview, saying that Republicans in Congress are “working on solving people’s problems and one of the big problems is our economy hasn’t been hitting its potential, and people deserve a tax break.”
“Nothing derails us from focusing on that, and that’s basically where a lot of our time and attention is focused on now,” Ryan added.
Sanders also weighed in, denying that the October 30 indictments of former Trump campaign officials would be a distraction to the tax reform effort, remarking that the indictments don’t “have anything to with us” and that the alleged actions “took place outside of the campaign.”
The plan to keep the itemized property tax deduction led the National Association of Home Builders (NAHB) to publicly oppose the pending tax reform legislation.
“Lawmakers missed a golden opportunity to give the American people a tax reform package that would boost middle-class families and promote greater housing opportunity for Americans across the economic spectrum,” NAHB Chair Granger MacDonald said in a statement. “Last week, it appeared that we had a deal that would establish a meaningful tax credit that would benefit tens of millions of households. Unfortunately, we were told by the House leadership that the credit will be removed from the bill.”
J.P. Delmore, NAHB’s assistant vice president of government affairs, recently told Tax Analysts that the organization wanted the home mortgage interest deduction and the property tax portion of the state and local deduction to both be repealed and replaced with a single homeownership tax credit, which would be credited against a taxpayer’s mortgage interest instead of being a fixed amount for a home purchase.
Brady praised NAHB’s work on the home credit proposal in an October 28 statement, saying that he hopes lawmakers “will examine it closely to determine if they want it included before tax reform heads to the president’s desk.” However, he told reporters October 30 that the credit proposal may be explored later.
“The speaker made it clear that he didn’t want to surprise members with a new home credit versus what they’re already familiar with, the itemized deduction,” Brady said.
MacGuineas also noted the NAHB’s opposition, predicting that the “massive lobbying push against any of the pay-fors or closing any of the loopholes is going to be incredibly loud.”
“We see that the homebuilders are going to come out against this plan,” she continued. “There will be others.”
Stephen K. Cooper, Dylan F. Moroses, and Asha Glover contributed to this article.
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