Plan to scrap state and local tax deduction hits resistance

FILE: President Donald Trump (Photo: The White House/Flickr, Public Domain)

WASHINGTON — President Donald Trump’s tax overhaul package is getting resistance from an unusual alliance of interests opposed to his plans to scrap the federal deduction for state and local taxes.

Republican lawmakers from high-tax states such as New York, California and New Jersey, along with labour unions and business groups like Realtors, are pressing the Trump administration to reconsider plans to eliminate the deduction. These groups are wary of the financial pinch their constituents could feel.

“This is really almost like a life or death issue for districts like mine,” says Rep. Peter King, R-N.Y., who represents a district on New York’s Long Island. “This cannot be called a rich district. It serves a lot of middle-income people.”

With Republicans splintered, the future of the $6 trillion tax overhaul plan is threatened by GOP defections, even as the success of the package is a political imperative for Republicans who have pinned their hopes on notching a big legislative achievement to help them retain control of Congress in next year’s elections.

Rep. Chris Collins, R-N.Y., a Trump ally, warned Wednesday that states such as New York, New Jersey, California and Illinois would need some “accommodations” to go along with eliminating the deduction for state and local taxes paid, possibly a cap on how much could be deducted.

Completely scrapping the deduction “would impact too many middle-income people,” Collins said.

The deduction is claimed by an estimated 44 million people and costs the government roughly $1.3 trillion over 10 years, money Trump wants to offset the costs of the plan.

But some Republicans and a coalition of groups opposed to the changes contend that repealing it would subject people to being taxed twice and would amount to a federal revenue grab on the backs of homeowners who pay property taxes. And governors like New York’s Andrew Cuomo, a potential 2020 presidential candidate, have rallied against the change.

“There will be a transfer of wealth of over a trillion dollars to the federal coffers,” said Matt Chase, executive director of the National Association of Counties.

Randi Weingarten, president of the American Federation of Teachers, said eliminating the deduction would not only “devastate funding for public schools, infrastructure, law enforcement and other vital services” but also boost taxes on the middle class. “For what? Tax cuts for the wealthy.”

The White House has argued that the plan is focused on helping middle-class workers, arguing that lowering corporate rates will boost jobs while the tax cuts and simpler tax code will reduce their burden.

Administration officials contend that the rest of the nation shouldn’t have to subsidize states like California and New York that use the state and local tax deduction in large numbers.

But that argument has drawn a strong retort from the states, who argue that they pay billions more in taxes than they receive in return from the federal government.

“New Yorkers send over $50 billion more to the U.S. government than they receive back. So New Yorkers, and in particular Long Islanders, are subsidizing the rest of the country; not the other way around as you suggested,” wrote Kevin Law, president and CEO of the Long Island Association, in a letter to Treasury Secretary Steve Mnuchin.

Officials with Trump’s National Economic Council met Wednesday with trade groups representing governors, mayors and others who opposed the changes.

It followed a meeting last week between a group of GOP lawmakers from high-tax states with Republican leaders, including House Republican Whip Steve Scalise, R-La., and Rep. Kevin Brady, R-Texas, who heads the tax-writing House Ways and Means Committee.

A possible compromise floated by the state-local defenders cracked open another fault line: Homeowners would be forced to choose between two popular deductions — one for local property taxes under the state-local deduction, the other for mortgage interest.

The Republican tax plan promises to retain the deduction of mortgage interest from federal income taxes. It’s another cherished tax break used by about 30 million Americans, heralded by supporters as a spark to home ownership. So in that case, homeowners would have to give up one of two deductions that they currently enjoy.

The quickly shifting situation has forced an influential lobbying group, the National Association of Home Builders, to revise its strategy. The group has actively lobbied in support of the mortgage interest deduction. Now it has split from other housing industry groups to support the GOP tax plan.

At its core, the plan proposes to nearly double the standard deduction, to $12,000 for individuals and $24,000 for families. Home Builders CEO Jerry Howard said that means the plan has already eroded the value of the mortgage interest deduction because people won’t be likely to itemize deductions given the bigger standard break.

Howard said the homebuilders’ group will be open to “broader options” for sparking home ownership, such as the low-income housing tax credit, which the plan keeps, and a possible new mortgage tax credit that wouldn’t require itemizing. “We believe that Congress is open to ideas,” he said.

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Associated Press writers Frank Eltman in Massapequa Park, New York, and Kevin Freking in Washington contributed to this report.