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Reform May Give High-Tax States a Property Deduction Choice

Posted on October 4, 2017 by David van den Berg

Taxpayers in high-tax states may get a choice between claiming the mortgage interest deduction or the state and local deduction on property taxes, House Republican Study Committee Chair Mark Walker, R-N.C., told Tax Analysts on October 3.

Walker said he discussed this idea at an October 2 dinner with House Ways and Means Committee Chair Kevin Brady, R-Texas, and three House Republicans from New York. Reps. Chris Collins and Lee M. Zeldin, both New York Republicans in attendance, offered a “very passionate plea, as far as why it would be important to have that option for people in their state,” Walker said.

Rep. Thomas MacArthur, R-N.J., however, dismissed the idea, saying, “I think offering me either $20 in my left pocket or $20 in my right pocket is sort of silly.” The choice would be “kind of meaningless for many people,” he said, adding that “if you’ve already paid off your mortgage, maybe it’s nice to choose the other. But I think we need to have a deduction for both.”

The future of the state and local deduction is unclear. House Republicans’ “A Better Way” tax reform blueprint assumed its repeal, and the unified tax reform framework released by congressional Republican leaders and Trump administration officials September 27 doesn’t mention the deduction. And while Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said he’d prefer to keep the deduction in place, Brady maintained that it would be repealed, but that he would still work with lawmakers who oppose repeal.

Walker said Republican leaders are trying to strike a balance to win the support of Republican lawmakers from high-tax states, and said that he can’t see a better way to accommodate those lawmakers than with what was discussed during the dinner. He said, however, that he still wants the state and local tax deduction to be fully repealed.

“I think it’s gone, and in my professional opinion — for whatever it’s worth — I hope it stays gone,” Walker said. “If we’re truly looking to make the tax code more simple, more fair, then we need to move on from that.”

Collins said he ultimately expects the final tax reform bill to have a compromise on the state and local deduction. The idea Walker mentioned was one of several discussed, he said.

“There could be an either-or of mortgage interest or property tax,” he said. “This was a discussion of how can we level the playing field to the point that we can get votes — Republican votes — from the 33 members that represent high-tax states.”

Brady regularly has dinner with House Republicans to talk tax reform, according to his spokesperson, who confirmed the October 2 dinner meeting and the discussion of the state and local deduction. Brady also told Tax Analysts that he’s confident he can get the support of Republicans from high-tax states for tax legislation.

“I haven’t seen a problem yet that isn’t solvable, including that one,” he said.

All or None

If accommodations like those discussed at Brady’s dinner are made for a specific set of states, there should be accommodations available across the board, said House Freedom Caucus Chair Mark Meadows, R-N.C.

“Is it fair for me to ask North Carolina taxpayers to subsidize high property and income tax in New Jersey and New York? My answer would be, ‘No, it is not fair,’” Meadows said. “If we’re looking at a deduction, let’s make sure it’s fair and equitable to everybody, or at least accessible to everybody. We can’t take a deduction from New York property taxes in North Carolina, last time I checked.”

MacArthur took issue with Meadows’s comments.

“Let’s remember who’s subsidizing who,” MacArthur said. “New Jersey has the worst balance of payments with the federal government of any state in the country. We’re subsidizing the rest of the country now, and this makes that balance of payments worse.”

“This isn’t a gift,” MacArthur continued. “Property tax and state income tax has always been deductible. We’re in a higher-tax state and we already get the least back from the federal government, and to make it worse is really, really unfair.”

The state and local tax deduction was introduced in the Revenue Act of 1913, according to a 2015 Congressional Research Service report, which notes that the deduction has since been modified and survived a repeal attempt from lawmakers during the 1986 tax reform effort.

Rather than repeal, Ways and Means Committee member Peter J. Roskam, R-Ill., said this time he expects that taxwriters will develop a modification to the deduction. “I think we’re going to find a soft landing on state and local to accommodate the members who have expressed an interest that come from high-tax states,” he said.

Ways and Means member Tom Reed, R-N.Y, said he is “open to a solution” on the state and local deduction and that he’ll work to protect his district and ensure the tax impact on its residents “is a positive one.” But the state and local tax deduction is ultimately just one issue that needs to be resolved regarding tax reform, he said.

“It was border adjustment when we began the process,” Reed said. “It’s state and local tax now. You’re going to have the net interest debate coming up; there’s going to be a whole slew of these issues as we continue to go forward.”

One of those issues may be the home mortgage interest deduction, and the National Association of Home Builders released a statement October 3 that could influence the debate around it. The association said it voted to revise its policy regarding the tax code in light of the recent tax reform discussions to give itself more flexibility. The association also said it supports tax incentives for homeowership and remodeling, the low-income housing credit, the exclusion of capital gains on the sale of a principal residence, and small business interest deductions.

Speaking at the Heritage Foundation on October 3, Rep. Andy Barr, R-Ky., suggested that the state and local deduction be means-tested so that high-income taxpayers lose the deduction, adding that this proposal could be made in lieu of adding a fourth tax rate on wealthy individuals. Barr said he is “sympathetic” to middle-income residents of high-tax states who use the deduction.

Stephen K. Cooper contributed to this article.

Follow David van den Berg on Twitter at @TAtaxDavidVDB for real-time updates.